IRA’s are great tools to use for tax and retirement planning.
You can contribute to a traditional IRA if your income fits within certain parameters. You may also be able to contribute even if you’re currently contribute to a 401k at work. With a traditional IRA you get a tax deduction directly off your gross income.
If you’re not interested in a tax deduction then the Roth is the way to go. Remember if you contribute to a traditional IRA or Roth through your bank or financial advisor you still have to fit the income parameters, so check with your tax professional before contributing.
The big advantages for the Roth is that it grows completely exempt from taxes and is a better method to transfer your assets to beneficiaries through your estate.
The yearly maximum limit for the IRA is $5500. There is a catch up contribution for taxpayers over 50 increase the total for those over 50 to $6500 per year.
If you’re short on cash don’t use your IRA as a source money. The intention of the IRA is a savings plan for your retirement, if you tap into IRA funds for your current cash needs your longer term retirement goals will suffer. The IRS also adds in a 10% penalty for funds withdrawn before age 59 ½. Also the funds withdrawn add to your current income often putting your tax return into a higher income tax rate. This can cost you a lot of money.
At 70 ½ the IRS forces you to take out minimum distributions from your traditional IRA. The Roth has no minimum distributions, thus the Roth has the ability to stretch your IRA to future generations. If you don’t need the money it’s a good idea to leave your Roth IRA alone.