Who wants to be a millionaire? It almost seems like a trick question. The truth of the matter is, all of us do. For many Americans, having a million dollars in the bank seems unattainable or unrealistic. It seems to be only for a world of people born into money and celebrities. Yet, the secret isn’t due to luck or being as complicated as you may think. The one thing you need is time.
Valley Federal Credit Union offers a variety of ways to help you save money and retire early. Let’s talk about how a Roth and traditional Roth IRA can help you on your journey to retirement.
Firstly, Why Join a Credit Union?
The reasons are many, but we’ll talk about the most important ones. Since credit unions are operated on a nonprofit basis, they’re able to offer:
- Better rates on savings accounts and CDs. According to the National Credit Union Association, the national average for a 5-year CD at a credit union was 1.34% versus a bank’s 1.15%. Credit Unions typically offer higher rates on savings and checking accounts.
- Easier approvals for loans and they are more flexible for customers who have good credit. This, of course, is great news to small business owners and entrepreneurs.
- Better rates for car loans. While banks charge an average of 4.78%, credit unions can go as low as 2.68%.
- Friendlier services and less hassle. Customer service reps take the time to learn about your finances and offer the best solutions on the spot.
- Fewer expenses to customers. Checking accounts, for example, can be opened with no minimum balance as opposed to banks, and some even offer free checks.
Valley Federal Credit Union proudly serves the Rio Grande Valley; we’re here to help you with great quality services in Roth IRA’s, loans, checking, saving accounts and more.
Second, What is a Roth?
IRA stands for Individual Retirement Account; most people mistake an IRA for a tangible investment when in reality it’s a great place where you can keep assets such as stocks, bonds and mutual funds. Think of it as your golden retirement basket that will mature with time. A Roth is a special retirement account where, for the most part, taxes are paid on the funds going into the Roth and all future withdrawals will be tax-free.
Now, there are prerequisites to an IRA; for example, the account holder’s tax bracket and when he or she retires. Contributions can be made at any age as long as the account holder has earned income. Some companies provide their employees with a 401(k), but unlike a 401(k), all types of IRAs are accounts that people who want to invest in their future open up on their own.
Let’s talk about the two most common IRAs and the ones VFCU offers. While the differences between a traditional Roth and a Roth IRA might seem nonexistent, they’re as different as night and day. The type of account you choose will have an impact on your long-term savings goals. It’s very important to understand the differences between both so that you can choose the plan that fits your needs.
A Traditional Roth will allow for any tax-deductible contributions, and a great feature is that it can grow tax-free. The only way for contributions and gains to be taxed is when they are distributed. Account holders have to be under the age of 70 who have earned any type of income, and filing jointly with a spouse also works. A Roth is great for retirement simply because your funds must remain in the account until the age of 59 and over. Rest assured by that time, if contributions were consistent, you’d have a good amount of funds.
Traditional IRAs also allow for contributions to lower your taxable income in the year they were made. This ends up lowering your gross income, which could help you qualify for other tax incentives. A student loan interest deduction or child tax credit could be some of the tax incentives you could qualify for. If you’re a qualified first-time homebuyer, you can withdraw up to $10,000 with an early withdrawal penalty. You will pay taxes on distribution, however.
Contributions from a Roth IRA are nontaxable and include income that is tax-free if the account has been activated for a minimum of five years. The account holder must also be over 59 years of age. One of the great benefits of a Roth IRA is if, at any time you want to use your contributions, it’s allowed and tax-free with no penalty.
For example, a Roth IRA will allow you to withdraw all of what has been contributed at any time. No reasons needed, you can leave with what you have without paying taxes or penalties. The only restriction is earnings the Roth IRA has made to your account. Withdrawals are generally taken from contributions first and distributions from earnings. Just remember distributions can be taxed if certain conditions aren’t met.
Are There Any Tax Incentives?
Yes! Traditional and Roth IRAs usually give great tax breaks. The only exception is that it all depends on the time you claim them. Contributions made to IRAs are tax deductible the year the contribution is made on state and federal tax returns. Withdrawals on the other hand are taxed at ordinary rates. Earnings and withdrawals are, for the most part, tax-free on Roth IRAs and don’t allow for tax breaks on contributions.
Can I Rollover My Roth 401(k) Into a Roth?
While this is something uncommon, since most traditional IRAs are born from 401(k)s, it’s still an option. Some employers are offering a new Roth 401(k) option to employees and the process is still the same. You can rollover your Roth 401(k) into a Roth IRA just like you can rollover a regular 401(k) into a traditional IRA.
Non-Roth 401(k) funds can also be rolled over into a Roth IRA. The only downside is you’ll have to pay a tax, as with all other IRA conversions. The IRS has a great breakdown of FAQs on rollovers here.
Start Saving Today!
There’s a mantra that many successful business owners live by: “The best way to be successful is to set yourself up for success.” Planning for your retirement should be no different. Whether you choose a traditional Roth or a Roth IRA, you’ll be on the path to a secure retirement.
We know learning about new savings and retirement plans can be quite daunting. We encourage you to call us at 956.546.3108 if you have any questions about the Roths that VFCU in Brownsville offers.