Investing for retirement may be one of the most important events that will take place in your life. In order to prepare for retirement and determine what types of investments can be helpful for your situation, you must first determine several things.
We believe retirement investing requires answers to specific questions like these in order to be effective in selecting among the most appropriate investments for retirement.
Tools to use for Retirement Investing
A Traditional IRA is a tax-deferred retirement savings plan. This type of investment allows you to make yearly contributions with money that may be deductible on your tax return. Any earnings can grow tax-deferred until you withdraw them during retirement. Having the ability to defer taxes means all of your dividends, interest payments and capital gains can compound each year without being hindered by taxes.
Many retirees also find themselves in a lower tax bracket during retirement than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
EARLY WITHDRAWAL: If you choose to withdraw money and you are under 59 1/2, you will be faced with a 10% IRS withholding on the Federal Level. And potentially, state and local taxes as well.
A Roth IRA is a retirement savings plan that allows the plan owner to contribute after-tax dollars, and cultivate those funds through investments on a tax-free basis. Funds in a Roth IRA may be invested in stocks, bonds, mutual funds, annuities and, in some specific cases, real estate. They can also be purchased from banks, so that the underlying investments would be standard banking products such as CDs and bank money markets. When the plan owner wishes to retrieve funds from the plan in retirement, he or she is not taxed at the time of a qualified distribution. This is the primary difference between a Roth IRA and a traditional IRA. Traditional IRAs are taxed at the time of distribution, rather than at the time of contribution. In addition, Roth IRAs are not subject to required minimum distributions.
To qualify for the tax free penalty free withdrawal of earnings, a Roth IRA must be in place for at least 5 tax years, and the distribution must take place after age 59 1/2 or due to death, disability, or a first time home purchase (up to $10,000 lifetime maximum). Before taking any specific action, be sure to consult with your tax professional.
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