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While retirement may seem like an event in the distant future, now’s the time to nurture your nest egg so you can enjoy a more financially secure life later on. When it comes to investing for retirement, the two most popular choices are Traditional and Roth IRAs. Both have certain tax benefits and specific rules for withdrawing money.
Savings in a Traditional IRA are tax-deferred until the money is withdrawn, meaning you'll need to prepare for the tax implications for your withdrawals. Contribute until you reach 70 1/2 if you or your spouse has earned income included on your annual tax documents. At age 70 ½, the IRS requires you begin taking annual minimum withdrawals from your Traditional IRA account, but you can start withdrawing penalty-free at age 59 ½. Also consider there are penalties that come into play when you fail to take the required minimum distribution. Several factors, including your IRA account balance and projected life expectancy, go into determining what “minimum” actually means for you.
Contributions to your Roth IRA are taxed before they are invested, so generally, these withdrawals will be tax-free. But there are some exceptions. If your Roth IRA account is at least five years old and you’re over age 59 ½, you won’t pay taxes on your withdrawals. If you’re withdrawing money from your Roth IRA before you reach age 59 ½, you’re subject to a 10% early withdrawal penalty tax on the investment gains only. You never will be penalized for withdrawing the amount of your original contributions, no matter your age, and the IRS doesn’t require you to take annual withdrawals. Also, as long as you have earned income being reported on your annual tax documents, you can contribute to a Roth IRA.
Once you've reached retirement, you'll need to budget and manage your money intelligently to keep your finances in order and ensure you maintain your path into retirement.
Make the most of your retirement years by creating a budgeting plan that allows you to experience life with less worry.