Personal Finance Essentials

Individual Retirement Accounts

Your Employer’s Plan Is Just the Beginning

Here’s the IRA Strategy That Could Save You Thousands in Taxes

Retirement IRA

Traditional IRAs

Whether or not your employer offers a retirement plan, you can supplement your savings with an IRA. Contributions may be tax-deductible depending on your income and whether you have a workplace plan, and your money grows tax-deferred until withdrawal.

When you leave an employer, moving your workplace plan balance into an IRA gives you more investment choices and greater control. Done correctly, there are no taxes or fees due on the transfer. Old accounts left dormant in former employers’ plans often sit untouched for years. Take your retirement money with you.

The Roth IRA

A Roth IRA works differently from a traditional IRA: you contribute after-tax dollars, but your money grows tax-free and qualified withdrawals are tax-free. This is most valuable when you are in a low tax bracket today. Roth IRAs have no required minimum distributions during the owner’s lifetime, which makes them useful for both retirement income planning and estate planning.

Converting a traditional IRA or 401(k) to a Roth requires paying taxes now in exchange for tax-free growth later. This can be advantageous for those who expect to be in a higher tax bracket in retirement or who want to reduce future required minimum distributions.

What to Avoid: The Nondeductible IRA

If you cannot deduct your IRA contribution, you are generally better off investing in a taxable account or another tax-advantaged vehicle. A nondeductible IRA creates complex tax-tracking requirements with minimal benefit and is rarely the right choice.

Self-Employed Retirement Plans

Self-employed individuals have access to powerful retirement savings tools, including the solo 401(k). This plan is designed for someone who is self-employed with no full-time employees. It has two contribution components: a salary deferral portion and a profit-sharing contribution of 20% to 25%, with combined limits substantially higher than a regular IRA.

Establishing these accounts correctly requires expert guidance. Ask a financial advisor familiar with small-business retirement plans before setting one up, to avoid IRS complications.