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IRA Accounts
IRAs Can Be a Smart Way to Invest in Your Retirement.
What is an IRA?
An individual retirement account (IRA) is a powerful, tax-advantaged investment account that helps you save for retirement. By taking pre-tax or after-tax income dollars and depositing them into an IRA account, you can then invest that money in stocks, bonds, exchange-traded funds or other assets. The balance grows over time depending on how you invest and how much you continue to contribute. There are limits on how much you can contribute to an IRA each year, set by the IRS, depending on the type of IRA.
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Benefits of an IRA
The main benefit of an IRA is that the money you invest grows either tax-free or tax-deferred while you wait for retirement.
Types of IRAs
FECA offers two types of IRAs, Traditional and Roth. The primary difference between the two is the timing of their tax breaks.
Traditional IRA
Tax-deferred Account
You don’t pay taxes until you take money out during retirement. (Or if you make withdrawals prior to retirement).
Contributions are often tax-deductible. However, withdrawals are taxed as income.
The amount that is tax deductible depends on your income and if you (or your spouse) have a retirement plan from your employer.
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Roth IRA
Tax-free account
You pay taxes upfront, because your contributions are not deductible, and the earnings on your investments grow tax-free.
Contributions to Roth IRAs are not tax-deductible, but withdrawals from Roth IRAs are often tax-free and there are no taxes on investment gains.
Roth IRAs are an attractive option for investors who have a long time before they retire.
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What if I have a 401(k)?
Many people have both a 401(k) and an IRA. With both a traditional IRA and 401(k) plan, you could provide tax-deferred savings for retirement and offer some tax breaks for contributing. However, they each have annual contribution limits. Your IRA contribution could be limited by your family’s income if you or your spouse have a 401(k) plan.
How do you choose which IRA is right for you?
As with any investment decision that will involve your taxes, you should consult a professional tax advisor. Thankfully, FECA members have access to no-cost initial consultation with FECA Financial Advisors.
Visit irs.gov for a comprehensive guide on both plans.