An introduction

All good things come to an end. Nothing lasts forever, not even diamonds if you ask me. We all age, get a little slower and eventually can’t work to the same level we used to. It’s time to discuss the important topic of retirement. I know it’s something no one usually thinks about but it’s a thing that you should probably consider if you haven’t thought of it already. Time stands still for no one and each passing day is an opportunity lost fore retirement savings, allow me to share a little savings tool known as the IRA.

An Individual Retirement Account, IRA for short, is a special domestic trust, custodial account or annuity established for saving for retirement. This is not a CD, a money market account, or any special type of investment (though you can make investments held under the IRA, more on that later). These types of accounts are established in banks, credit unions, loan associations, insurance companies, brokerage firms or any organization that can demonstrate they can lawfully administer the trust.

Retirement savings

IRAs were created to help supplement retirement savings, promote economic growth, and lessen the burden on social programs (SSI, SSA, etc.). Most people will have 4 primary sources of income for retirement: 1) social security income 2) employer sponsored retirement plan benefits (i.e. 401k) 3) IRA and other personal savings and 4) wages. Some people will need all 4 of these retirement incomes necessary to retain their current lifestyle after retirement.

IRAs and the US tax law

IRAs are subject to tax law and all kinds of fun legalities such as contribution limits and changes made by the government to make getting an IRA more desirable and increase rollovers into an IRA. There are 2 main types of IRA: traditional or roth IRA. Traditional IRAs have the benefit of being tax deductible if eligible, has tax deferred earnings and potential tax credits if eligible as well. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution; withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs offer tax deferred earnings, tax free earnings if there are qualified distributions and, if eligible, tax credits as well. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. There are other types of IRAs created by changes in tax laws such as savings match incentive programs for employers (SIMPLE) IRAs, SEP IRAs, Self-Directed IRAs, and others.

Full disclosure

When setting up an IRA you need three key documents to provide to your customer: the plan agreement (contract) between the customer and the financial organization, the disclosure statement expressing the details of the IRA in non-technical terms, and a financial disclosure displaying the projection of the growth of the IRA investment (such as a CD, or money market account within the IRA)  if desired as well. These are provided to the IRA owner for their records and there is a copy retained for the financial organization as well.

Ownership and successorship

When setting up an IRA you also have the option for setting up beneficiaries. As an account service specialist,  I STRONGLY recommend placing a beneficiary (or several) on your different accounts in the event of your death. Save your loved ones the trouble of dealing with the courts to get your IRA or any other account closed and add a beneficiary. With an IRA you can add primary beneficiaries as well as contingent beneficiaries in the event of the primary beneficiary passing as well. Each beneficiary will receive a portion of the IRA funds upon your death. In some states you also have what is called spousal consent; this essentially requires your spouses consent on major changes to your IRA including adding beneficiaries. Certain states adhere to the spousal consent rule, check with your financial institution to see what regulations are in place for marital /community property are in your state when setting up your IRA.

Setting up and IRA and all their Intricacies can be daunting but I am hoping, by the end of my series on IRAs, that you’ll have a better handle on what these tools are and how to use them. I will say there is a lot of tax law involved with these so depending on your tax needs I would always say do your homework and if need be seek the advice of a tax consultant if you’re unsure of what retirement plan will suit your situation. Tune in next time when I present part 2 of my IRA series, until then, invest wisely my friends.