Watch CBS News

Retirement Planning: Understanding IRAs

(Photo credit: Thinkstock)

Navigating the rough waters of retirement planning takes forethought on the part of the future retiree, and sound advice from a professional who deals with wealth management.

"I've never spoken to anyone who said they wished they had planned less, or that they saved too much," says Jim Harris, a wealth manager and regional director at Money Concepts who has spent more than 30 years helping people with retirement planning. "I have met many that wished they had done more."

When asked the keys to successful retirement planning, Harris suggests setting up an IRA. Below is a basic overview of IRAs.

What is an IRA?

An IRA -- or Individual Retirement Account -- is created and designed specifically to help individuals save and invest for retirement on a tax advantaged basis. There are annual contribution limits of $5,500 for individuals under the age of 50; individuals age 50 and up may contribute up to $6,500 a year. There are multiple types of IRAs. Each has its own set of specific rules and regulations in terms of who can contribute, what amounts can be contributed, and when contributions can be made.

(Sponsored Video Source: Charles Schwab YouTube Channel)

Compare Traditional IRAs with Roth IRAs

The main difference between a Traditional IRA and a Roth IRA are the tax advantages. Traditional IRAs are designed to provide an immediate tax deduction on a current tax return, while continuing to defer taxes on contributions and earnings until withdrawals begin during retirement. Roth IRAs are designed to enable contributions without taking an immediate tax deduction, making contributions and earnings tax-free in retirement. Generally speaking, the longer you have until retirement income is needed, the more advantageous your Roth IRA contributions become.

(Sponsored Video Source: Charles Schwab YouTube Channel)

What to consider when taking money out of an IRA

There are tax penalties up to 10 percent in addition to federal income taxes with certain types of early withdrawals from Traditional IRAs. Investors may be penalized if they withdraw funds before age 59½, though there are numerous exceptions. Another key age to remember with Traditional IRAs is 70½, which is when Required Minimum Distributions (RMDs) begin. RMDs are amounts investors are required to withdraw annually. They are intended to force Traditional IRA holders to begin paying income taxes on their savings. For a Roth IRA, there are no RMDs.

(Sponsored Video Source: Charles Schwab YouTube Channel)

Rolling over a 401k into an IRA

"This subject has been in the news a lot lately," said Harris. "In my opinion, it is almost always the right thing to do when an employee changes jobs or retires." Harris explains that rolling over a 401k to an IRA creates additional investment options. A 401k can be split into several different IRA accounts, each with different strategies and goals. All 401k rollovers should be done as a "direct rollover" or from "trustee to trustee." This avoids mandatory tax withholding issues.

"There is only one reason you should not automatically roll over your 401k to your IRA when you change jobs or retire," says Harris. "Consider the overall difference between the costs you incur leaving the money in your 401k versus the costs that will be associated with your IRA."

(Sponsored Video Source: Charles Schwab YouTube Channel)

Other retirement questions to consider

When planning for retirement, consider these basic questions:

  • What are your goals for an enjoyable and financially secure retirement?
  • What are your priorities?
  • How much income will you need? Will it be 70, 75, 80 percent or more of your current income?
  • Do you have enough saved to retire financially secure?
  • Consider how long you may live in retirement. Will it last 20, 25, 30 years or longer? Remember the longer you live, the more income you will need to fight the effects of inflation.

The information above is intended to offer general financial insights. People's individual financial situations and circumstances may vary. Before creating or making changes to your financial plan, do plenty of research and consider speaking with a finance professional.

Rick Limpert is a freelance writer and photographer in Atlanta. His work can be found at Examiner.com.

View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.