If you’re looking to save more for retirement but you have maxed out your contributions to your 401(k) retirement account or do not have access to one, you may want to look into opening an individual retirement account (IRA). There are several different types of IRAs, each with key tax benefits that make them a better option than traditional savings accounts or even other investing accounts.
Through an IRA, you can invest in stocks, bonds, and other types of assets. The specific investments available vary by institution, with banks usually offering certificates of deposit and similar options and brokers focusing more on stocks and bonds.
Read on to learn more about IRAs:
1. You can own real estate in an IRA.
Many people don’t know that they can invest in real estate through their IRA. (Though it is not the best investment option for everyone, it is a legal holding.)
Investing in real estate can be complex, so you should fully understand its pros and cons prior to going forward with it. Furthermore, there are specific rules for holding real estate in an IRA, so it is imperative that you understand them all. If you do not follow regulations set forth by the Internal Revenue Service (IRS), your entire IRA could be disqualified, which could be expensive and potentially devastating.
2. IRA rollovers can help consolidate old 401(k)s.
The rules about moving money out of a 401(k) can be quite complicated. Some people think that they will always have a tax obligation for doing so prior to retirement, but this is not true.
One of the great benefits of an IRA is the ability to move old 401(k)s into the account through a rollover or transfer, which is a non-taxable transaction provided that you follow the rules. (The tax obligation is held since you are not actually making a withdrawal but instead transferring money from one tax-advantaged account to a new one.) This consolidation is helpful for keeping better track of assets and facilitating easier management of investments.
3. Money can be moved from an IRA to a 401(k).
A number of 401(k) plans make it possible to transfer IRA money back into a 401(k) plan, just as you can do the opposite.
Doing this sort of reverse rollover can allow you to avoid required minimum distributions during retirement or convert non-deductible IRAs into Roth IRAs. Also, some people choose to do this to take advantage of low-cost funds offered through a 401(k).
Financial planners can help you through the process and explain the different benefits that a reverse rollover offers.
4. Spousal contributions to IRAs are possible.
Each IRA has an annual maximum contribution, which makes it difficult for such an account to serve as the sole source of retirement income. However, you can boost the amount in the account through spousal contributions.
Spousal contributions are possible with both traditional and Roth IRAs. The spousal contribution rules are meant to increase retirement income for couples in which one person does not work. The working spouse can contribute additional amounts to an IRA on behalf of the person not earning an income.
The IRS has specific rules about spousal contributions that are important to follow, but provided that all conditions are met, it is a great way to increase tax-advantaged savings.
5. An IRA comes with creditor protection.
401(k) assets are protected from creditor claims, and the same protection extends to money in an IRA.
Up to $1 million in an IRA is protected from bankruptcy under current federal law. This protection applies to all IRA money rolled over from 401(k)s and other plans, as well as money personally contributed. In fact, the creditor protection can extend beyond $1 million for money rolled into an IRA from an employer plan. Unfortunately, the protection does not extend to inherited IRA money.
Individual state law also plays a role in determining protections from creditor claims, so it is important to check with local policies. It’s especially important if you’re considering cashing out a 401(k) to pay down debt.
6. Beneficiary designations on an IRA matter.
When opening an IRA, you need to understand that the beneficiary designation overrides what is in both a will and a trust. While a trust and will are important, so is regularly updating beneficiary designations on accounts. If an old name is placed on an IRA as the beneficiary, that will override what is written in a will or a trust.
Changing the designation is fairly simple and involves filing some paperwork. A financial advisor, bank official, or even the human resources department at your company can help you through the process. Making sure everything is up to date can avoid some difficult situations down the line.