Which IRA is right for me?

Contributing to an IRA—short for “individual retirement account” —is a great step to take on your path to retirement. With an IRA, you can invest your savings and defer taxes on any earnings until you make withdrawals down the road. No wonder 91 percent of people who have an IRA feel confident about their retirement savings, compared to 64 percent1 of those who don’t.1
For many of us, the hardest part about saving in an IRA is getting started. With various types of IRAs to choose from, tax considerations, government jargon and rules about withdrawing your money, it can feel overwhelming. Here’s help: A simple description of the two main types of IRAs, along with when they may make sense for you.

Is a traditional IRA right for me?

First, let’s start with the basics—traditional IRAs. Anyone with “earned income,” meaning income subject to tax, can contribute to an IRA until the year in which they turn 70½ years old.
There is an annual limit on how much you can put in an IRA. For the 2019 tax year, you’re allowed to contribute up to $6,000 to a traditional IRA—and the deadline for getting the money into the account is April 15, 2020.
If you’re at least 50 years old, you can invest even more: Starting the year you turn 50 and every year after that, you can make what’s called a “catch-up contribution.” For the 2019 tax year, people who are at least 50 can contribute an additional $1,000, meaning the most you could contribute altogether would be $7,000.
Here’s the deal with taxes: Your contributions may or may not be tax deductible. It depends on whether you or your spouse are covered by a workplace retirement plan, and also whether your income exceeds certain amounts.
But even if you don’t get a tax break upfront, there’s still a potential tax advantage: Any earnings on the investments inside your traditional IRA are protected from taxes until you start taking money out. In other words, your investments can grow tax free as long as they stay inside the IRA.
So, when and how can you get to your IRA savings? These accounts are meant for retirement, so if you make a withdrawal before you turn 59½ years old, there’s a 10% penalty, plus the tax due on any tax-deferred contributions and earnings.
But once you reach the year of that half birthday, you can start making withdrawals with no penalty. Keep in mind, though, that you will owe any tax due.
Starting no later than April 1 of the year after the year when you turn 70½ years old, you no longer have a choice: You have to start taking what are known as “ required minimum distributions,” or RMDs. (So, if you turn 70½ in 2019, you would have to take your first RMD by April 1, 2020.) The IRS could assess penalties if you don’t start on time, but there’s help: Most IRA providers have tools and information to help you get your withdrawals right.

Traditional IRA features

Make contributions, regardless of your income.

Contributions are often tax deductible.

Pay no taxes until you take money out.

Is a Roth IRA right for me?

You’ve likely heard a lot of buzz over the years about the other main type of IRA—Roth IRAs. That’s because Roth accounts offer the potential for tax- free growth. Unlike traditional IRAs, which offer the immediate benefit of tax-deductible contributions while you’re working (if you meet the requirements mentioned above), the main appeal of Roth IRAs is the long-term benefit of tax-free future income.
But does a Roth IRA make sense for your retirement? If so, are you eligible to open one, or should you convert your existing retirement accounts to a Roth? As you might guess, the answer depends on your personal situation. But here are some considerations that may help you decide if a Roth IRA is right for you.
The potential benefits:
  • Withdrawals are tax free and penalty free after age 59½. That’s because money placed in a Roth IRA is taxed in the year it’s deposited. Any growth on your money is tax free, as well.
  • Because withdrawals are not taxable, they aren’t included in the formula that determines how much of your Social Security is taxable. (Withdrawals from traditional IRAs, 401(k)s and 403(b)s are counted in this formula.)
  • There are no mandatory withdrawals (required minimum distributions, or RMDs), allowing you to keep funds in the account as long as possible.
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How Roth IRAs work:
Roth IRAs offer the same investment options as traditional IRAs, but they have unique features that may help you make the most of your money, depending on your situation. Consider these moving parts, especially when preparing or updating your retirement income plan or estate plan:
  • Saving on taxes if you’re retired: If you’re retired, you can move money from a traditional IRA or other qualified retirement accounts to a Roth IRA. (More below.) This may be beneficial if you expect your tax bracket to be higher in the future when you take your money out than it is now.
  • If you’re still working: Contributing to a Roth IRA may also be beneficial if you expect your tax bracket to be higher when you take money out. For the rules and limits on contributions, go to the IRS web page comparing Roth and traditional IRAs .
  • If you’re still working and your income is too high to contribute directly to a Roth IRA, you can roll over money from a traditional IRA or old retirement plans to a Roth IRA to get the benefits of tax-free income in retirement.
  • Leaving money to others: Because there are no mandatory withdrawals (RMDs) from a Roth IRA, it can be a tax-efficient way to pass money to others. Roth IRA holdings—including any accumulated growth—pass directly to your beneficiaries free of income tax, and without having to go through a court-supervised process known as probate. (One note: estate tax may still apply.) For the details of your personal situation, it may make sense to consult a tax advisor.
     

Traditional IRA vs. Roth IRA

So now that you know a bit about traditional and Roth IRAs, which one do you choose—or do you choose both? Here’s a quick way to size up the options:

Traditional IRA

  • Contributions may be tax deductible.
  • Anyone under age 70½ with earned income can contribute.
  • Pay no taxes until money is withdrawn.
  • Must begin making withdrawals by age 70½.

Roth IRA

  • Contributions are not tax deductible.
  • Eligibility is based on how much you earn. Contribute at any age.
  • Never pay taxes on qualified withdrawals after age 59½.
  • Withdrawals are never required.
If you’re considering a Roth or traditional IRA for your retirement strategy, the TIAA IRA Selector Tool can help you find out which type of IRA may be best for your financial situation.
TIAA’s IRAs also offer another benefit: You can use them to save in an annuity, which could take care of the RMD requirements. (More below.)

Should I roll my workplace savings into an IRA?

If you’ve saved some money in your workplace retirement plan, you may be wondering what to do with it if you move from one job to another. Moving that money into an IRA can be an easy way to manage your retirement savings from your past—and future—jobs in one place. When you leave a job, you generally have four things you can do with your retirement savings: leave the money in your old employer’s plan, roll it into your new employer’s plan (if that’s allowed), roll it into a new IRA, or cash out of the plan.
While getting immediate access to your money is tempting, you’ll face tax penalties for cashing out early. Those penalties could eat up as much as 40% of your savings. For example, if you cashed out $5,000 of your savings from a 403(b) plan, you could be left with as little as $3,000.
There may be some advantages to leaving money in your old employer’s plan. For example, you could pay less in mutual fund fees through an employer’s plan than if you invested those funds with an IRA. However, by leaving the money in the prior employer’s plan, you risk having your retirement money scattered with more than one old employer over time as you switch jobs. There are a number of benefits when you consolidate retirement accounts from previous jobs into an IRA:
  • Creating a “home” for all your rollover assets from future jobs.
  • Making it easier to manage your investments and keep track of diversification.
  • Less paperwork.
  • Cutting the number of fees.
  • Making it easier to track RMDs.
     

Should you roll over retirement money to a Roth IRA?

You can roll over money from most retirement plans, including traditional IRAs, 401(k)s and 403(b)s to a Roth IRA—regardless of your income. But should you?
With a Roth conversion, you pay taxes when you convert based on your current income-tax rate. You would generally owe no additional income tax on the converted funds—or any earnings on those funds—during retirement, provided you own your Roth IRA for at least five years.
So, rolling over money to a Roth IRA might be a good choice if you want to:
  • Receive income-tax-free earnings in retirement.
  • Keep funds in your retirement account as long as possible.
  • Leave income-tax-free assets to your heirs.
     
If you don’t expect to be in a higher tax bracket in the future, you may be better off not converting retirement accounts to a Roth IRA. Keep in mind, however, that even though you will not be working full time in retirement, your taxable income could still increase due to Social Security payments, part-time work, required distributions from non-Roth IRA accounts, and the loss of some deductions or tax credits you may have had while working, saving for retirement and raising a family.
Here are other important things to know about rolling over to a Roth IRA:
  • Because money in your traditional IRA is after-tax money (you didn’t take a deduction on your contributions), you may not owe tax on that portion when you convert to a Roth IRA.
  • If you’re retired, you can convert all or part of other retirement accounts, including 403(b) or 401(k) plans, to a Roth IRA. You’ll owe tax on any pretax assets you roll over.
  • If you’re working, you would need to check your current employer’s plan rules to see if you can roll over money to a Roth IRA. But you should be able to roll over money from previous employer plans.
  • Also if you’re working, your employer may offer a Roth version of your retirement plan—a Roth 401(k) or Roth 403(b). If so, you can generally convert your regular 401(k) or 403(b) to the Roth plans. Then, when you leave your employer, you can roll over your Roth 401(k) or 403(b) directly to a Roth IRA. Check with your employer regarding treatment of matching contributions and other details, as they can vary.
     
And timing could be everything when it comes to taxes: If you convert a large sum to a Roth IRA, it may raise your tax bracket for that year since the amount you convert is considered taxable income. This may be avoided by converting no more than what would keep you in your current federal income tax bracket without bumping you into the next one. If you think your income may drop substantially in a certain year but will increase in future years, you could plan to convert to a Roth since you may be in a lower tax bracket that year.

One alternative to consider…

RMDs are not your only choice for making IRA withdrawals in retirement. There are other ways to take income from your IRAs and qualified plans that meet the IRS requirements, including through annuities.
Before you start taking RMDs, consider a few potential drawbacks:
  • If you’re looking for steady, reliable lifetime income, RMDs may not be suitable. The amount of income you get can change each year based on your age and the performance of the underlying investments.
  • You have to take an RMD every year, even in down markets.
  • The penalty for not taking your full RMD on time is steep: 50% of the amount you should have withdrawn but didn’t.
     
But you can meet the IRS requirements and overcome some of the drawbacks in other ways, including payments from a fixed annuity, which can provide you with income for life. And it may reduce the hassle of tracking how much you need to withdraw each year.
Any amount you convert to an annuity payment satisfies your RMD, and then the amount no longer figures into that calculation after you convert it. An annuity can provide a stream of lifetime income so you don’t need to worry about outliving your money.
You may already have annuity assets available in your TIAA retirement plan or IRA—check with your employer or log in to your TIAA account to see if you do.
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