When Does an IRA Make Sense?

May 4, 2015 - Laura
Many workers have a retirement savings account through their employer’s 401 or 457 plan. But does it make sense to also have an IRA? If so, when should you start saving in one? And, which one is the right one for you?
 
You can contribute up to $5,500 ($6,500 if you’re 50 or older) to either a traditional IRA or a Roth IRA in 2015.
 
Traditional IRA. The tax benefits of a traditional IRA are a lot like those of a 457 or 401 plan: Your earnings grow tax-deferred until you withdraw the money in retirement and, depending on your income level, your contributions may be tax-deductible. The traditional IRA, however, doesn’t have the flexibility of a 457 — you’ll generally owe a 10 percent penalty for withdrawals taken before age 59½. Also, at age 70½ you will need to start taking required minimum distributions (RMDs) from the account.
 
Roth IRA. With a Roth IRA, there is no up-front tax break, but you won’t owe any income taxes on the earnings if you withdraw the money after age 59½ and have had a Roth for at least five years. And you can withdraw your contributions at any time tax- and penalty-free; there is no RMD rule. These tax-free withdrawals can be most valuable if you expect to be in a higher tax bracket when you take out the money. A Roth IRA has no minimum distribution requirements at any age, and your heirs may be able to inherit money from your Roth without owing income tax.
 
Whether you qualify for a Roth depends on your income. In 2015, you can contribute to a Roth IRA if your modified adjusted gross income is less than $116,000 if single, or $183,000 if married filing jointly. The contribution amount is gradually phased out until your income reaches $131,000 if single, or $193,000 if married filing jointly.
 
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