Investment Corner: Individual retirement accounts
Wouldn’t it be great if we could work for 30-40 years, retire, and be taken care of financially for the rest of our lives? Fifty years ago, when people didn’t live as long and many companies offered pensions, a lot of people lived that promise! Today, very few Americans are fortunate enough to have a pension—typically government employees, who often earn a lower salary than private-sector employees but get the pension as a nice benefit.
If you want to retire at a reasonable age and have enough money for the rest of your life, you’ll need to plan carefully. One of the simplest tools out there is the “Traditional” Individual Retirement Account”, or IRA. This is one of two popular IRA types—the other being the Roth IRA—and this Traditional IRA is what we will focus on here.
This type of IRA is easy to set up with most financial institutions or financial advisors. You can put in up to the annual limit of $7,000 for 2025, or $8,000 if you are aged 50 or more. Once you have money in your account, you typically have a broader range of investment choices than you would in most 401(k) or other workplace plans. In addition, the earnings on the investments in your account grow tax-free until you withdraw funds—a very nice tax advantage for savers!
Traditional IRAs have some other perks as well. Since they are not through your employer, you can keep them for a lifetime, regardless of job changes, moves, or other life changes. In terms of taxes, a nice perk is that you can take a tax deduction on the amount you put in each year (although if your employer offers a workplace retirement plan, you and your spouse may not be able to deduct your IRA contributions, depending on your income level). Also, if you’re married but one spouse is not working, the working spouse can make contributions to their non-working spouse’s IRA. Normally, one needs work income in order to contribute to an IRA and get a tax deferral.
Not everything about an IRA is great, though. The annual contribution limits are low, so most investors can’t realistically expect to save enough for retirement with just an IRA and Social Security. Also, as mentioned above, employees who are offered a retirement plan at work may not be eligible for a tax deduction for their IRA, depending on their income level.
Another disadvantage of IRAs is that, similar to many other retirement plans, withdrawals before age 59 ½ are penalized (with some exceptions). That means you will generally have to pay regular income tax plus a 10% penalty if you withdraw funds before that time. If you think you are likely to need some of those funds before age 59 ½, it probably makes sense to keep some of your savings in a regular investment account to avoid that penalty.
All in all, IRAs are a great way to save for your retirement. They are easy to set up, low cost, and generally give you a great variety of investment options. Unfortunately, an IRA alone is unlikely to meet all of your retirement needs, so look for a variety of ways to save and invest.
However you choose to save for your retirement, invest smart and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Returns are not guaranteed and past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
