It’s not often that the government gives you a break on your taxes worth thousands of dollars over several decades, and it would be foolish indeed not to take advantage of it. But that is apparently what a surprising number of Americans are doing year after year by ignoring the tax benefits of an Individual Retirement Account, or IRA. Although there are different types of IRAs with different restrictions, they all basically allow you to put away a sizeable chunk of your income each year and avoid paying taxes on any gains you earn on it for as long as you hold the account, which is usually until you retire.
The fact that so many people ignore this opportunity is all the more astonishing given the number of Americans who are unprepared for their own eventual, and inevitable, retirement. The widespread absence of sound future planning has been developing into what Forbes magazine has referred to as the “greatest retirement crisis in American history”.
Nonetheless, fewer than half the people eligible for an IRA account are enrolled in one. If you are one of these people, we at Litchfield Bancorp are here to help. We offer a variety of IRA’s to fit most every individual’s needs and financial situation. Even if you have a 401k or other retirement account through your employer, you can often still take advantage of the benefits of an IRA. And since even those people who do have an existing retirement savings plan may not be putting aside enough to adequately provide for their retirement, more than one retirement plan is not a bad thing. In some cases, those funds can be rolled over or combined into a new or existing IRA account.
Since its inception in 1974, the IRA program has been expanded to include a few different options. The most common account is the traditional IRA, which as of 2016 allows you to contribute up to $5,500 of pre-tax income per year, so whatever amount you invest will be exempted from your 2016 tax bill. If you are 50 years or older, the limit goes up to $6,500. (For individuals who also have an employer-sponsored plan, these amounts may vary somewhat.) Moreover, any interest the account earns will not be taxed until you begin withdrawing from the account after the age of 59½, at which point the amount you withdraw will be taxed as normal income. By waiting until you are retired and earning less money, you will be able to pay a much lower tax rate.
A popular variation on the traditional IRA is the Roth IRA, which more or less turns the above scenario on its head. With a Roth you invest after-tax dollars into your IRA account, meaning you still have to pay taxes this year on that amount. But unlike the traditional IRA the Roth allows you to make tax-free withdrawals after you have reached retirement age. There are income limitations on the Roth IRA, but a great advantage of the Roth is that the tax-free disbursements can be passed along to your heirs.
Litchfield Bancorp can help you decide which of these plans works best for you or show you how any of our other IRA plans might suit your needs, including the SEP-IRA for self-employed individuals or the SIMPLE IRA, which incorporates employer matching funds to help you build your nest egg more quickly. Each plan has its own set of advantages and qualification restrictions, but with our help you can sort through the maze of possibilities to create the bright future you deserve.
Torrington Branch Manager, Assistant Vice President
NMLS MLO ID: 880889