If you are planning for your financial future, it might be a good idea to contribute to an individual retirement account (IRA), which is a tax-advantaged account meant for long-term savings. Some IRAs are available through employers, but the two most common—traditional IRAs and Roth IRAs—are designed for you to use on your own.
These accounts are similar but do differ when it comes to tax deductions, accessibility of funds, and eligibility. Before you decide where you want to invest your money, it’s best to understand the difference between these two types of accounts, and we’d love to help!
At Telco Credit Union, we offer Individual Retirement Arrangements (IRA) and certificate accounts. IRAs permit you to make tax-deferred contributions so that you are financially stable when you retire. Before opening an IRA account, it’s important to evaluate your financial needs. Consider what your Social Security benefits will be, and then calculate how much money you’ll need when you retire. You’ll want to look ahead and set yourself up for financial security.
Traditional IRA contributions are tax-deductible for the year you make the contribution—both state and federal. Withdrawals, or distributions, are taxed at your income tax rate when you make them. Contributions to traditional IRAs generally lower your taxable income in the contribution year. That lowers your adjusted gross income (AGI), possibly helping you qualify for other tax incentives you wouldn’t otherwise get, such as the child tax credit or the student loan interest deduction.
If you withdraw money from a traditional IRA before age 59.5, you’ll pay taxes and a 10% early withdrawal penalty. You can avoid the penalty (but not the taxes) in some specialized circumstances like when you use the money to pay for qualified first-time homebuyer expenses (up to $10,000) or qualified higher education expenses.
On the other hand, you don’t get a tax deduction when you make a contribution to a Roth IRA. This means it doesn’t lower your AGI that year. But your withdrawals from your Roth IRA during retirement are tax-free. That’s because you paid the tax bill upfront, so you don’t owe anything on the back end.
Roth IRAs have income-eligibility restrictions. In 2021, for example, singles must have a MAGI (Modified Adjusted Gross Income) of less than $140,000, with contributions phasing out starting with a MAGI of $125,000. Married couples must have modified AGIs of less than $208,000 to contribute to a Roth, and contributions phase out starting at $198,000.
These limits increase for the 2022 tax year. The MAGI for single filers maxes out at $144,000 and begins to phase out at $129,000, while the MAGI range for married couples filing jointly is $204,000 to $214,000.
Roth IRAs carry no required minimum distributions (RMDs), which means you’re not required to withdraw any money at any age or during your lifetime at all. This feature makes them ideal wealth-transfer vehicles. Beneficiaries of Roth IRAs don’t owe income tax on withdrawals, either, though they are required to take distributions or else roll the account into an IRA of their own. Unlike a traditional IRA, you can withdraw sums equivalent to your Roth IRA contributions penalty- and tax-free at any time, for any reason, even before age 59.5.
At Telco Credit Union, we offer both Traditional and Roth IRA accounts with no monthly fees. By using these types of IRA accounts, your earnings will grow tax-deferred until they are withdrawn, and your contributions are fully deductible. If your account has been open for five years with qualified reason on a Roth Account, earnings are tax free as well. Another benefit of opening an IRA account at Telco is that contributions can be withdrawn at any time, tax and penalty free. Roth accounts do not require distributions after you are 70.5 years old.
The requirements of opening an IRA account with Telco Credit Union include: being a Telco member, earning income from compensation, and depositing a minimum of $1,000. It’s that simple! Contact us at Telco to get started. Serving Eastern North Carolina, Telco Credit Union is a trustworthy and reliable way to save and earn money.