It is never too early to begin saving for retirement. FPCU offers several options that can help you get started!
Traditional IRAs were created to provide retirement income to individuals and can be a valuable tool in saving for retirement. Contributions to a Traditional IRA may be tax deductible in some instances, but it is best to consult with a tax professional in regards to the tax benefits of an IRA.
A Roth IRA provides flexibility for members who would like to start saving for retirement, but may want the option of withdrawing the funds for a qualified distribution. While the Roth IRA itself is not tax deductible, a qualified distribution it would not be subject to federal income tax or subject to the IRS early distribution penalty.
A withdrawal would be considered a “qualified distribution” from a Roth IRA if it occurs after the fifth year of your first Roth IRA contribution or the first taxable year in which it was converted from a traditional IRA, and if the person withdrawing the funds meets at least one of the following criteria:
- is over the age of 59 1/2
- is disabled
- is using it for a qualifying first-time home purchase
- is the beneficiary after a death
Educational Savings Account Certificates (ESA)
ESAs are designed to assist saving specifically for the higher education expenses of a designated beneficiary. Contributions to an Education Savings Account are not tax deductible.
- The beneficiary of the ESA must be less than 18 years of age when the account is opened and funds must be distributed by the time they reach 30 years of age.
- Contributions are limited to $2000 per beneficiary, each year and can be reduced based on the modified adjusted gross income of the individual making the contribution.
- An ESA can cover the cost of college tuition, fees, books, supplies or equipment, as well as room and board. If funds in an ESA are not used for educational expenses the funds become taxable and are subject to a 10% penalty.
Keep the following in mind when considering a Traditional, Roth or ESA IRA:
- Each working individual (under age 50) can contribute up to $5,500 per year to a Traditional or Roth IRA or up to $6,500, if over the age of 50. The contributions to an ESA are limited to $2000 per beneficiary, each year and can be reduced based on the modified adjusted gross income of the individual making the contribution.
- Withdrawals from an IRA can begin at age 59½ and become mandatory at age 70½.
- Early withdrawal penalties may apply to a Traditional, Roth or ESAs.
- Income tax laws and regulations can and do change regularly. Information here is to provide a general understanding of the products available to you. A tax professional should be consulted to ensure the best course of action before opening an IRA.