IRAs as Building Blocks—Retirement: 2 of 6

In Part One of this series, Zions Bank Senior Vice President Paul Hansen offered an overview of some key considerations when planning for retirement. In Part Two, Hansen reviews IRAs, the building blocks of a retirement plan.

“After some Zions Bank clients expressed concerns about keeping IRAs open, I realized there was confusion out there,” Hansen says. “An IRA, or Individual Retirement Account, is a vehicle for saving. It’s not the investment itself. IRAs can be used to invest in stocks, bonds, mutual funds, Certificates of Deposit, money market accounts and other investment vehicles such as real estate. When investing in an IRA through a bank, clients can put their money in CDs and money market accounts covered by FDIC insurance for up to $250K.” (Check the FDIC website for details about insurance coverage limits as the coverage limits for certain types of accounts will change back to $100,000 at the end of 2009.)

“In the current economic climate, clients might want to think about CDs and money market accounts,” Hansen continues. “But they should definitely continue to save toward retirement whenever possible.”

Zions Bank offers a number of IRA plans, including three FDIC-insured IRA options. All plans are offered in both traditional and Roth flavors. Because it can be difficult to know which is best for one’s individual situation, Hansen provides some guidance.

The first consideration, Hansen says, is eligibility. Both types of IRAs have certain restrictions. Individuals who are 70.5 or older can only contribute to Roth IRAs, for example, but Roth plans have certain income caps that don’t apply to traditional IRAs.

The main difference between the two types of IRAs is how they’re taxed. Contributions made to traditional IRAs are eligible for a tax deduction when the contribution is made. Contributions to Roth IRAs don’t get the tax benefit when the money is put into the account. However, withdrawals from Roth IRAs aren’t taxed, whereas withdrawals from traditional IRAs are.

For individuals who are eligible for both types of IRA, Zions has outlined some guidelines:
• For investors who want a deduction now, a traditional IRA may be the way to go.
• Those who want tax-free earnings should probably consider a Roth IRA.
• If you expect your tax bracket to go down at retirement, a traditional IRA is probably best.
• Those whose tax bracket will remain the same or increase at retirement might try a Roth IRA.
• Traditional IRAs have required minimum distributions that kick in at 70.5. For those who don’t want mandatory withdrawals imposed at that age, a Roth IRA will be the better option.
• Individuals looking to lower the effect of estate taxes by reducing an estate should consider a Roth IRA.
• The further you are from retirement, the greater the advantage of choosing a Roth IRA.

If all this still sounds confusing, that’s probably because it’s hard to make blanket recommendations about investing for retirement. Some investors may even benefit from contributing to both kinds of IRAs. Hansen recommends sitting down with a financial planner to review both your current situation and your expectations for the future. Remember, your retirement plan should be as tailored to you as are your retirement dreams.

Please note: The preceding article is offered for informational purposes only, and should not be construed as tax advice or as pertaining to specific factual situations. Consult a tax adviser concerning your own needs and circumstances and to obtain any tax advice with respect to the topics discussed in the article.

Featured in the March/April 2009 issue of Zions Bank’s Community magazine.

*Artwork from Felipe Skroski under Creative Commons license at Flickr.com.