Are you looking forward to retirement in 10 – 15 years or does retirement now seem like an impossible dream? Many of today’s 50-year-olds fear they haven’t saved enough, especially given the poor returns their savings have generated in the past five years. Perhaps you wonder if there is a best IRA for you.
Reduced returns and increased longevity require people in the second half of their careers to rethink retirement. Rather than fearing the specter of literally working yourself to death, use this as an opportunity to take action.
If you know you haven’t saved enough to retire comfortably, then you need to take action now. The most important concept is that wealth is built $100 at a time – day after day, month after month. You have time and you can generate more income.
The best IRA for 50-year-olds is most likely the Roth IRA. Here are reasons why.
On-going Contributions. As long as you have sufficient earned income, you can keep contributing $6,000 per year, every year, to a Roth IRA, no matter how old you are.
Although you may not want to work full time at age 73 or 78, the chances are that you will want to work some. So many people who retire find themselves at lose ends. Doing something productive keeps people involved and mentally active.
Plan to keep working some. If you are working, keep the savings habit going. At 50, assume you will continue building your Roth IRA for 25 years or more.
No Minimum Required Distributions. With a traditional IRA, at 70 ½ you must begin taking money out and paying taxes on that money. With a Roth IRA, you can leave the money to grow until you absolutely need it.
If you are 50 now, at least a portion of your savings will have 40 years to grow. Money you save today and take out when you are 90 has as much time to grow as money saved by a 25-year-old who withdraws it at 65.
Tax-free growth. The IRS calculates that the tax benefits of the traditional IRA and the Roth IRA are neutral. Either you are taxed at the end or at the beginning, but the net amount you have to spend is actually the same.
That calculation is true as long as the tax rates are the same. Tax rates don’t actually remain the same though. They change under different political parties and under different macro-economic conditions. They change depending on your income and your marital status.
Current tax rates are at historically low levels. Government deficits are at historically high levels. The chances are tax rates will go up. Knowing that your investments are growing tax-free is a major factor making Roth the best IRA for a person in mid-life.
What About Income Limits?
The Roth IRA is phased out for high-income earners. It is possible that at age 50 you are making more than the maximum allowable adjusted gross income. That amount is determined by your tax filing status. If you are married filing jointly, in 2011 your contribution begins to be phased out at $169,000. If you earn more than $179,000 you cannot contribute to a Roth IRA.
If you are single, the maximums are $110,000 and $125,000. For 2012, each of the maximum figures adjusts up by $2,000. Please check Pub. 590 from the IRS to determine how high income might impact your IRA contributions.
High-income savers might check into opening a traditional IRA, making a non-deductible contribution and then rolling that into a Roth IRA. Talk with your tax preparer about this option.
Best IRAs for Mid-life Savers
Whether you are well on your way to saving your retirement nest egg, or just realizing something must be done immediately, consider opening a Roth IRA. In most situations, it will be the best IRA choice for you.
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