Regardless of your retirement plan at work, setting up either a Traditional or Roth IRA (individual retirement account) – or a SEP IRA - still makes a lot of sense.
But your first step should be to see how much you’re going to need when you retire. Our retirement calculator can help with that. Once you have that number, it’s a matter of figuring out what retirement savings plans you want to use.
The biggest reason to add an IRA is to add more to your tax-deferred savings. If you’re in an employer-sponsored 401(k), only a certain percentage of your paycheck can go into the plan.
Also, your 401(k) may not have a lot of investment options. Some plans are very basic and don’t offer a great deal of choice, or the choice they offer is with mediocre investment products.
Depending upon which IRA you choose to open, you may be able to make a broader range of investment choices. And this is where a skilled investment advisor can help. We work with CUNA Mutual Group, a set of advisors that specifically serve credit unions and their members, to make sure you get the best advice for your individual needs.
The Freedom of IRAs
As far as the specific IRAs go, you want to take all your retirement savings into account. IRAs are set up like a 401(k), except you can choose the stocks and funds that are in the IRA. And in a self-directed IRA, your options are even broader.
Usually, 401(k) plans are chosen by your employer and you only get what they offer, which may not diversify your money enough or get you the right exposure you need to make your money work for you.
If you’re not comfortable picking the investments for your IRA, set up a free initial visit with one of our investment advisors, who can get you started.
Which IRA to Choose
When it comes to building your strategy with IRAs, there’s one key point to remember.
The Traditional IRA is tax advantaged on the front end (while you’re saving) and the Roth IRA is tax advantaged on back end (when you need to access your money). Also, the Roth is more flexible about getting your money before you turn 70 ½ years of age.
SEP or SIMPLE IRAs are for self-employed professionals or companies with 100 or fewer employees and they work like a Traditional IRA.
For SEP and Traditional IRAs, your contributions into the IRA are tax deductible and your money can grow without tax implications. But you have to start taking your money out when you turn 70 ½ and that money is then taxed like income.
For a Roth IRA, your initial contributions aren’t tax deductible, but you can withdraw your contributions with much more flexibility.
One smart strategy is to set up a Traditional IRA and a Roth IRA so you can work the advantages of both while limiting the disadvantages to both. When you get to this stage, it will pay to set up a meeting with a financial planner who has your best interests at heart.
If you like this article and want to read more about planning for retirement, check these out:
- A Quick Guide to Retirement Planning
- Turning Retirement Savings into Retirement Income
- Saving vs Investing