An individual retirement account (IRA)* can help you supplement your defined benefit pension plan through CalSTRS or CalPERS, as well as give you another tax-advantaged savings vehicle in addition to your 403(b) or 457 plan.
The virtue of an IRA lies in its ability to amplify your savings due to tax-advantaged growth. If you leave your money untouched, your earnings will grow faster than they would in an equivalent taxable account.
A traditional IRA allows you to defer taxes on the account earnings. In addition, you may be able to deduct all or part of the contribution from your taxes if you are eligible. Deductibility depends on whether you or your spouse are active participants in an employer’s retirement plan, and on your income. When you begin taking withdrawals at retirement, taxes will be due on the amount you withdraw each year.**
Advantage: If you qualify, a traditional IRA allows you to take a tax deduction for the year you contribute – and that means you’ll save money on your tax bill. Plus, the money in your IRA grows tax-deferred until retirement. (Note that you cannot deduct your contribution to a traditional IRA if you participate in your 403(b) plan unless you meet income limits.)
Limitation: You will owe taxes on your deductible contributions (the money you put in) and earnings (the interest or investment gains the account makes) when you withdraw the money in retirement.*
A Roth IRA offers tax-free growth when you hold it for at least five years and begin taking distributions after age 59½. To be eligible, a single taxpayer's adjusted gross income must be less than $120,000 and a couple filing jointly must have income less than $177,000. The money you contribute to a Roth IRA is after-tax, meaning you’ve already paid taxes on it.
Advantage: If you are eligible, your money in a Roth IRA grows tax-free, plus you’ll pay no tax when you withdraw the money in retirement. If you think your tax bracket may be higher in retirement than it is now, a Roth IRA can help reduce your future tax burden.
Limitation: Because the Roth IRA is only available to people who meet certain income requirements, far fewer people can take advantage of the benefits of a Roth. Beginning in 2010, more people will be able to benefit from a Roth IRA by opening a traditional IRA and then converting it to a Roth IRA because the income limit for conversion will be lifted.
One of the advantages of an IRA is that you are not limited to the investments available in your 403(b) or 457 plan. You can choose – on your own or with the help of a financial advisor – from literally thousands of stocks, bonds and mutual funds, as well as cash, certificates of deposit and money markets. You can even keep investment real estate in your IRA. There are some prohibited investments, though. For example, you cannot put collectibles, such as art or antiques, in an IRA.
Save More with an IRA
Your pension or 403(b) plan may fall short of your retirement savings goals. An IRA is one more tool to help you save for retirement – so take full advantage of this opportunity for tax-advantaged savings. You can contribute up to $5,500 to an IRA for 2014. People over age 50 can make an additional $1,000 catch-up contribution. The deadline to contribute for 2014 it is April 15, 2016.
* Note that the IRS refers to these accounts as Individual Retirement Arrangements (see IRS Publication 590). However, they are commonly known as individual retirement accounts.
** Withdrawals prior to age 59½ may be subject to a 10% IRS penalty.
Where to Open an IRA
You can open an IRA at your bank,
credit union, mutual fund company, or at a brokerage house. Be sure to
ask what investments are available (for example, if your credit union
does not offer investment services, you may only be able to put your
IRA money into an insured IRA certificate), what the minimum opening
deposit is, what the minimum contributions are and what fees are