IRAs

An Individual Retirement Account or IRA is a great way to plan ahead and save for retirement. Choose a Roth IRA and enjoy tax-free savings. Or open and fund a tax-deferred Traditional IRA. If you're new to IRAs, be sure to call 866-724-6328 or email us at fcu@pahowhofcu.org to learn more and find the option that's right for you.

 

The Difference Between Traditional and Roth IRAs

If you earn income in U.S. and pay taxes on those funds, then a U.S.-based IRA could work in your favor. However, it’s important to know how these accounts work before opening one. We’re here to help.

There are two basic IRA options available with your PAHO/WHO FCU membership. Depending on your current income, where you plan to be during retirement, and a few other factors, there’s an option that’s right for you.

Traditional IRA

The individual retirement account is a personal, tax-deferred account for people who are employed, and their spouses. Your eligibility will depend on your income among other factors. A traditional IRA has a cap on tax-deductible contributions. You can usually contribute more if you are over age 50. Whatever you contribute towards your IRA comes off your yearly taxable income, thereby reducing total tax liability. However, when the money in an IRA is withdrawn, it is subject to standard income taxes and an additional 10% penalty if withdrawn before the age of 59 1/2.

Traditional IRAs require you to begin taking your money out once you reach age 70 1/2. When you begin to receive distributions from a Traditional IRA, the income is treated as ordinary income and may be subject to income tax.

Roth IRA

These IRAs provide even greater flexibility than traditional IRAs. Contributions are made with income that has already been taxed. This allows you to earn tax-free interest depending on when withdrawals are made. After five years, both contributions and earnings in the account can be withdrawn without penalty or taxation.

A Roth IRA isn't for everyone. You may be able to contribute to a Roth IRA for yourself or your spouse if you have earned income. Your eligibility will depend on your income among other factors.

Final Thought

Once you reach age 59 1/2, you may qualify for tax-free withdrawals of both contributions and any accumulated earnings. Unlike traditional IRAs, Roth IRAs don't require you to take distributions at age 70 1/2, and you can keep contributing to them as long as you have earned income, making a Roth IRA an effective option for both retirement and estate planning purposes.