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Alternative IRA Avenues to Your Employer’s Retirement Program

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Stashing retirement savings in a 401k plan is not only an attractive option but a smart one as well. You get large tax advantages, the money is automatically taken from your paychecks before you have the chance to spend it, and sometimes, if you’re lucky your employer contributes money to your account in what’s known as an “employer match”.
Perhaps most importantly, it allows you to compound money over time. Compound interest, if taken advantage of from a young age, can make you a millionaire when your retirement years roll around. But what’s most unfortunate, is that not all companies offer a 401k plan.

If that’s the case for you, don’t worry. You have plenty of equally attractive options.

1. Traditional IRAs

A traditional IRA (Individual Retirement Account) is just as it sounds: An account opened and maintained by an individual with the purpose of saving money for retirement. Like a 401k plan, IRAs also offer tax breaks: You contribute pre-tax dollars and let that money grow tax-deferred over time. You’ll pay taxes on your contributions (and investment gains) only when you withdraw the money, which you can do starting at age 59 1/2. It’s important to note that any withdrawal made before then is subject to taxes plus a 10% penalty fee. The maximum yearly contribution is $5,500, or $6,500 for people age 50 or older.

2. Roth IRAs

With a Roth IRA, contributions are taxed when they’re made, so you can withdraw the contributions and earnings tax-free once you reach age 59 1/2. This means you’re only paying taxes on a portion of your savings (your contributions), while with a traditional IRA, you’re taxed on every penny (contributions and earnings). Note that there’s an income cap on the Roth IRA so that only married people earning less than $184,000, or single people earning less than $117,000, are allowed to make the maximum yearly contribution of $5,500 ($6,500 for people age 50 or older).
If you contribute to a traditional or Roth IRA, you’ll want to check to see if you qualify for the saver’s credit, that’s a tax credit that could be worth as much as $2,000 for individuals and $4,000 for couples.

So, which one should you choose?

It depends on your individual situation. Do you think you’re in a higher tax bracket now than you will be when you retire, or do you anticipate jumping a bracket or two by retirement age?
If you’re earning more now, you might be better served with a traditional IRA, since you’ll be paying taxes down the road; if you expect to earn more in the future, you might be better served with a Roth, since you pay taxes today.

When you’re ready to open an IRA, simply choose a firm and set up your account online.

3. Open a myRA

The US government recently launched a new type of retirement savings plan, it’s called “myRA” (My Retirement Account), and it’s specifically designed for those who don’t have access to a 401k or other retirement plan at work. Like a Roth IRA, you contribute after-tax earnings that grow over time and can be withdrawn tax-free for retirement. As an additional benefit, you can also withdraw the money tax-free for emergencies at any time without penalty (unlike the traditional IRA and Roth IRA).

The income cap is $131,000 (or $193,000 if you’re married and file taxes jointly) and employees can contribute up to $5,500 a year ($6,500 for people who are 50 or older). A myRA account definitely has its pros, everyone within the income limit now has access to a no-fee retirement plan, and it encourages saving among a wider range of workers — and its limitations, most notably that the account is capped at $15,000. At that point, you have to roll the balance over into a regular, private IRA.

No matter the retirement savings account you choose, the most important step is to open an account, and start saving for your future.