Saving for retirement can be a complex journey, with numerous options to consider. Navigating these choices can be confusing. However, when it comes to planning for retirement, Individual Retirement Accounts (IRAs) are a powerful tool that can help you grow your savings and ease the tax burden. Whether you choose a Traditional IRA or a Roth IRA, both offer unique benefits that can significantly impact your financial future. In this blog, we’ll explore the advantages of these retirement accounts, how they work, and why they are essential for building generational wealth.
Tax Advantages of IRAs
One of the most significant benefits of both Traditional and Roth IRAs is the tax advantage they offer. When you put money into either type of IRA, you don’t have to pay taxes on your gains yearly. This means that your investments can grow without the drag of annual taxes, allowing your money to compound more effectively over time.
Traditional IRA: Immediate Tax Benefits
With a Traditional IRA, you can claim a tax deduction for your contributions each year, which can lower your taxable income and reduce your tax bill. This immediate tax benefit can be particularly valuable for those looking to lower their tax liability while saving for retirement. However, it’s important to note that withdrawals from a Traditional IRA in retirement are subject to income tax.
Roth IRA: Tax-Free Withdrawals
A Roth IRA is a type of individual retirement account (IRA) where you pay taxes on money going into your account, and then all future withdrawals of earnings are free from tax and penalty once you reach age 59½ and the Roth IRA has been open for at least five years. Compared to earnings, you can withdraw contributions tax- and penalty-free at any time. This means that if you grow $50,000 to $100,000 over 20 years in a Roth IRA and retire at 70, you can withdraw the entire amount without paying any taxes on your gains. This tax-free growth can make a substantial difference in your retirement savings.
Roth IRAs are best if you expect your marginal tax rate to be higher in retirement than it is right now. Single tax filers cannot contribute to a Roth IRA in 2024 if their modified adjusted gross income (MAGI) is more than $161,000 ($165,000 in 2025), while for married couples filing jointly, the limit is $240,000 ($246,000 in 2025). The 2024 and 2025 contribution limit is $7,000, with catch-up contributions of $1,000 allowed for those age 50 and up.
Roth IRAs for Minors: Building Generational Wealth
At Fidelity, we offer a unique opportunity to start building wealth early with a Roth IRA for Minors. Parents can set up a Roth IRA for their children, even as young as 12 years old. For example, if a child earns $700 in a year from activities like cutting grass or babysitting, parents can contribute that amount into a Roth IRA on their behalf. Funds invested in a Roth IRA for 50 years, even in conservative investments, can grow significantly. This long-term growth potential makes Roth IRAs for Minors an excellent tool for building generational wealth and setting up future financial security.
Contribution Limits and Gift Tax Exclusion
Contributions to a Roth IRA are not subject to the federal gift tax up to a certain amount. For example, you can contribute up to $90,000 per beneficiary in a single year without affecting your lifetime gift-tax exclusion. This allows for substantial contributions that can grow tax-free over time, providing a significant financial advantage for the beneficiary.
Investment Options and Flexibility
Both Traditional and Roth IRAs offer a variety of investment options, allowing you to tailor your portfolio to your risk tolerance and time horizon. Whether you prefer stocks, bonds, mutual funds, or other investment vehicles, you can create a diversified portfolio that aligns with your financial goals. This flexibility ensures that your retirement savings can grow in a way that suits your individual needs and preferences. Most financial institutions, banks, and brokerage firms, both brick-and-mortar and online, offer a Roth IRA.
Conclusion
Retirement accounts like Traditional and Roth IRAs are essential tools for building wealth and securing your financial future. With tax advantages, flexible investment options, and the potential for significant growth, these accounts offer a powerful way to save for retirement. Whether you’re looking to reduce your tax burden with a Traditional IRA or take advantage of tax-free withdrawals with a Roth IRA, these accounts can help you achieve your financial goals. And with options like Roth IRAs for Minors, you can start building generational wealth early, setting up future generations for financial success.
