You may look forward to taking a long-awaited break when you retire, but have you got your finances in order?
Individual retirement accounts (IRAs) are one of the many financial tools you can use to plan your retirement. Read on to learn how IRAs fit into overall retirement planning and what you can do today to protect your long-term financial interests.
What Is an IRA?
An IRA is a retirement savings account you can open with a financial institution. The account allows you to save for retirement and generate returns on your earnings while enjoying certain tax advantages. There are two main types of IRAs:
- Traditional IRAs: Under a Traditional IRA, you put in pre-tax money now and pay the taxes after you retire.
- Roth IRAs: With a Roth IRA, you pay your after-tax income now and don’t pay taxes later.
Your employer may offer a retirement plan similar to Traditional or Roth IRAs, such as the government-sponsored MarylandSaves or 401(k) plans. Be sure to check with your employer what options may be available to you.
How Much Can You Save on Taxes With an IRA?
Your tax savings will depend on multiple factors, including how much you put into the account and your tax bracket when you make deductible contributions and withdrawals. Keep in mind that if you withdraw funds early, you may get a tax penalty that could decrease or altogether eliminate your tax savings.
IRAs and Retirement Planning
As part of your broader estate planning, you would need to decide who will receive your IRA when you pass away. You should always consult with an experienced estate planning lawyer, as inheriting an IRA can have significant tax consequences.
Leaving your IRA to a minor child or grandchild also necessitates careful planning. You want to avoid a situation in which withdrawals happen too soon or the court takes over control of the IRA on behalf of the minor. Complications may also arise if you plan to leave your IRA to a spouse with children from another relationship.
Another thing to keep in mind is that you should always diversify your investment portfolio to protect your retirement savings from crashes in the stock market.
Talk to a Maryland Retirement Planning Attorney
Retirement planning is complex but doesn’t have to be overwhelming. At the Law Office of Ralph W. Powers, Jr., P.C., we can guide you through the process and help you protect your assets.