Have you seen any statistics regarding Americans’ retirement savings lately? If you have, then you know that it’s a national scandal that the media should be focusing on every day. According to experts’ best estimates, most of us have less than ten thousand dollars saved toward our retirement. You read that right: less than $10,000. That might be enough to cover a little over a month’s worth of nursing home care for a retiree whose health fails. Obviously, that’s something that needs to be addressed, especially in a society where millions of older Americans are set to leave the workforce in the near future.
The question is, though, what can be done? Generations ago, Americans had three elements that made up the average retirement plan: their own savings, a company pension, and their Social Security benefits. Now, the savings rate has collapsed, few companies offer actual pensions, and Social Security’s future is a matter open to debate. With that obvious deterioration of traditional retirement planning strategies, how can you save the money you’ll need when your working days are done? For a variety of reasons, you need an IRA to help ensure that you can retire as planned.
What is an IRA?
An Individual Retirement Account, or IRA, is a type of account that provides you tax savings while you save for retirement. In some respects, it’s like the 401(k) plans offered at many companies these days, in that it enables you to put your own money into an account that invests those funds over time to provide you with the wealth you need to retire later in life. Like other types of investment vehicles, it utilizes compounding principles to grow your wealth over time.
IRAs can be opened at banks and investment companies, and you can fund them every month just as you would a 401(k) plan. Your contribution is limited based on your income, but that money sits in the account throughout your working years, growing tax-free. Yes, that’s right; the money that you put into a traditional IRA is deducted before you are taxed. That means that your income for that year is taxed at a lower rate, since the IRA contribution reduces your total income for tax purposes. Of course, the taxman does eventually get his due later in life, as taxes must be paid on money that you withdraw when you retire.
There are two main types of individual retirement accounts: the traditional account that we discussed above, and the Roth IRA. The Roth IRA differs from the traditional version primarily in the way that contributions are taxed. For while the traditional IRA’s contributions are made tax-free and then taxed when they’re withdrawn in retirement, the Roth contributions are made after taxes. The benefit of the Roth is that your later withdrawals can be made without being subject to additional taxation. That can make it an attractive option for those who are in lower tax brackets now and anticipate that their tax obligation might be much higher later in life.
Why Do You Need an IRA?
If your company has a 401(k) program in place, you may have no need to use an IRA too – though it can be a beneficial way to reduce your income tax obligation if you have excessive income right now. When there are no company plans in play, however, an IRA can be your best option for securing a steady retirement income outside of Social Security. These plans are often much safer than simply buying stocks and bonds on your own, and can be a great way to help you focus your money management plan on retirement asset growth.
As a rule, if you have private investments and savings and a company pension or 401(k), those two retirement vehicles – along with Social Security – should be enough to see you through your retirement years. That three-stooled approach is in line with traditional retirement planning strategies. The reality is, though, that you’re probably missing at least one of those components. An IRA can help to provide the balance and additional retirement income that you’ll need when you leave the workplace.
How Can an IRA Work for You?
An IRA can provide you with long-term benefits when it comes to saving for retirement, but there are short-term benefits as well. For example, the traditional IRA enables you to delay taxation on a portion of today’s income, which may enable you to enjoy lower tax rates in the future – when your income tax rate could be much lower as a result of your retirement. That’s more likely for most older workers, which is why experts recommend that people who are closer to retirement opt for the traditional plans.
However, the most important benefit provided by the IRA is also the most obvious. We live in an age where most Americans have little or no real savings. The very habit of saving money is often publicly discouraged by politicians who urge us to shop and banks that offer near-zero interest rates for average savings accounts. It’s no wonder we have no savings to our credit.
The IRA can change that dynamic by providing you with a structured way to save each month. Sometimes, that structure is all that we need to help us commit to a sound savings plan, and that commitment is essential if you’re going to eventually retire with the financial resources that you need to live the same type of lifestyle that you now enjoy.
Can an Attorney Help?
Retirement planning is one of the most important things you can do to ensure that your late-life needs are met. It’s also vitally important to ensuring that your estate planning efforts can achieve your goals. At the Law Offices of Mary A. Miller, P.C., we can work with you to help you understand and implement the IRA you need to meet your retirement income objectives. To find out more about how an individual retirement account can work for your planning needs, contact us online or give us a call at (914) 939-6565 today.