How Investing in an IRA Can Help You Prepare for Retirement

As financial professionals, we advocate for individuals and families to consider investment diversification as a means of cultivating their portfolios and attaining financial autonomy. This practice can help curtail the overall risk entailed in their portfolios and propel them towards achieving their financial and retirement goals. One way of diversifying your portfolio is to consider investing in an individual retirement account (IRA), thereby securing a source of income for your retirement. Let’s delve into the specifics of this investment option and how it can help you with your retirement readiness.

An Individual Retirement Account

An IRA functions as an individual retirement account that empowers individuals to accumulate their earned income for retirement purposes. Two distinct types of IRAs exist: the traditional IRA and the Roth IRA. Each of these alternatives harbors its own set of tax benefits, which can be leveraged either immediately or during your retirement phase. Opting for an IRA can bestow upon you heightened flexibility within a long-term investment strategy, a facet potentially not as common within a 401(k) or workplace plan.

The Tax Benefits

Investing in a traditional IRA or Roth IRA can be a good option for retirement savings because of the tax advantages endorsed by the IRS throughout the process. In the case of a traditional IRA, you can defer taxes on both your earnings and contributions until you attain eligibility for your mandatory required minimum distribution (RMD), thereby capitalizing on tax-deferred growth.

Conversely, although there is no immediate tax advantage with a Roth IRA, it could potentially grant you complete tax exemption once you reach the age of 59 ½ and are eligible to withdraw your funds. Essentially, the decision comes down to whether you opt to pay taxes now or defer them until later. Collaborating with a financial professional can prove to be instrumental in ascertaining an optimal choice for your financial objectives and retirement plan.

Converting Your Workplace Retirement Accounts

If you have a 401(k) or a 457 plan, it might be prudent to consider the transfer of these funds into an IRA, as it opens the door to a number of diversified investment options. Over the years, 401(k)s have garnered fame for offering a multitude of investment choices, yet this array has gradually contracted due to the associated costs for the company administering the 401(k) program. Instances of 401(k) plans featuring as few as five investment options have become increasingly commonplace.

In scenarios such as market downturns, unforeseen early retirements, or instances of gaps in employment, it may be worth exploring Roth conversions and potentially moving your money from a taxable traditional IRA into a non-taxable Roth IRA.

Consider Working With a Financial Professional

We highly recommend enlisting the services of a reputable financial professional who can conduct a thorough evaluation of your situation. At Financial Dynamics, our financial planners utilize software to gauge the tax implications tied to converting your workplace retirement accounts into a traditional IRA or Roth IRA to ensure this aligns with your retirement plan. We will provide you with a preliminary estimation, liaising with your CPA to ensure transparency concerning potential tax liabilities. Our job is to look at your financial situation holistically and offer a recommendation that serves your interests.

Ultimately, the choice between a traditional IRA and a Roth IRA, as well as the decision to transition workplace retirement accounts, demands thorough consideration. Collaborating with a seasoned financial professional equips you with the insight and analysis required to make informed decisions that are congruent with your financial goals and aspirations. By delving into the tax benefits and diversification opportunities inherent in these options, you can pave the way for a more secure and prosperous retirement journey.

Advisory services offered through J.W. Cole Advisors, Inc. (“JWCA”). Financial Dynamics & Associates, Inc. and JWCA are unaffiliated entities. These are not intended to represent any specific investment. Non-Securities products and services are not offered through JWC/JWCA.