Saving early for retirement can have a HUGE impact on supporting a nice retirement lifestyle in your later years, and many adults, young and middle age alike, get that. But, at the same time, not all adults are working for companies that offer employer-sponsored retirement savings plans, like a 401(k) or 403(b).  So, how do you start saving? One option is through Traditional IRAs and this video is here to help you learn more about these lovely gems.

 Hi, I’m Donna Kendrick of Sephton Financial Services. Welcome to Widow & Wisdom (your wealth edition), a video series for families in transition. This video series is for the listeners whose tomorrow is very different from their today, whether it be through widowhood, divorce, or career change, this series is made to help you figure out your new tomorrow.

Let’s talk about Tax-Deferred savings.  

Funds in a Traditional IRA accumulate tax-deferred, meaning you don’t have to pay taxes on the funds until you start taking withdrawals or distributions in retirement. The hope here is that you will be in a lower tax bracket during retirement than you are right now.  Withdrawals will be taxed as ordinary income.  

Now there is a catch, if you take funds out before age 59.5 the funds will be taxed at your ordinary income tax rate at that time PLUS a 10%  penalty. There are some exceptions like disability, 1st time home purchases, and a few others (always consult with a qualified professional before taking an early withdrawal).  

Otherwise, you MUST start taking withdrawals at age 72, these are called your RMDs or Required Minimum Distributions.  Now, we love tax-deferred savings because a bigger amount, since taxes have not been withdrawn, can grow and compound year after year.

Another important point is that Traditional IRAs are Tax Deductible

Each year the government tells us what our contribution limit is, for 2021 if your earnings are in line, you may be eligible to put up to $6,000 into a Traditional IRA (if you are over age 50 there is a $1000 catch up limit).  Now there are some rules (what’s life without some rules). 

  • First, If you are an active participant in a workplace retirement plan, your IRA deduction may be reduced or not allowed.  
  • Second, There are income limits.  For example, I am single, if my modified adjusted gross income (or AGI) is $66k or less I am eligible to receive the full tax deduction.  If I am single and make more than $76k, I am no longer eligible for the tax deduction. And conversely, when I am married in 2022, the AGI for my husband and I can’t be more than $125k.  There are partial deductions for the amounts in between. 

Complicated?  A little!  Non-deductible contributions make things even a bit more complicated and a word of wisdom is to track those contributions well and perhaps open a separate Traditional IRA to support those savings, or highly consider a ROTH (we will be making a video on ROTHs soon).

Traditional IRAs can be a great way to keep track of your retirement funds!

Why do I say that?  The era of getting one job at age 18 and staying with that company until you retire has pretty much seen its end.  Many of my clients in their early 40’s have had 5 to 8 employers in the last 20 years.  Imagine that each of those employers offered a 401(k) plan.  Keeping track of each of those plans and making sure all of the funds are invested towards your goals and risk tolerance can get complicated.  You have the option of a rollover into a Traditional IRA so that you can consolidate the accounts, there are no penalties or taxes charged for a rollover.

You can have all funds invested in one Traditional IRA, one portfolio and you get to choose your investments through a wide variety of options: stocks, bonds, mutual funds, cash equivalents, real estate, and other investment vehicles. You won’t be limited to the varying employer plan investment offerings. 

Before making the decision to roll your funds consider the costs of the different types of available accounts and the investment options offered.  Remember… You can also roll the funds into your current employer’s 401(k) Please be sure to speak to your financial professional to carefully consider the differences between your company retirement account and investment in an IRA. These factors include but are not limited to changes to availability of funds, withdrawals, fund expenses, and fees.

I hope you have liked this brief overview of traditional IRAs. The main things to remember about Traditional IRAs are:

  • The tax-deferral of funds which includes the benefit of compounded earnings and hopefully a lower tax bracket during withdrawal in retirement.  
  • Tax-deductible contributions…lower your taxable income, keep more of your money!  This can also be helpful if applying for financial aid for school when your children reach college age.
  • A great vehicle for 401(k) & 403(b) consolidations leading to more investment choices and perhaps professional management.  Be sure to consider the pros and cons and compare costs. 

Do you have a collection of 401(k)’s or 403(b)’s that you’re trying to keep track of?  I am happy to help you put together a list of the accounts and see how they are each invested. Most times, when we look at the accounts as a full picture, we see there is an oversaturation of one asset class or another. This can put your money at unnecessary risk.  Reach out for a free discovery call and we can discuss getting your financial picture together.  

Thank you for joining us for this episode of Widow & Wisdom (your wealth edition), where your mindset and money matter most. Be sure to like and share us with your friends and loved ones and follow us on Instagram for more practical money talks for families in transition.