You work every day to secure the future of your operation, but what are you doing to secure your own financial future? Everyone dreams about retirement from time to time, but unless you actively initiate an investment plan, those dreams will remain simply a part of your imagination.
Whether or not you’ve started saving for retirement, opening an Individual Retirement Account is a smart idea. You can use it to supplement other retirement strategies or it can serve as a starting point. Either way, it’s never too early – or too late – to begin saving for your golden years.
The two most popular options are the traditional (or deductible) IRA and a Roth IRA. The biggest difference between the two is that you don’t pay taxes on the traditional IRA until you begin withdrawing from the fund, whereas with the Roth IRA withdrawals are tax-free. In either case, you can only invest a total of $2,000 per year into IRA’s whether you have one account or several.
“An IRA is a cheap investment, especially when you’re first getting started,” says Darrell Dunteman, agricultural consultant and accountant, Bushnell, Ill. “There are few administrative costs and you don’t have to file papers with the Internal Revenue Service.”
So how do you know which IRA option is right for you?
First off, you need to consider your current age and income, along with your current and projected tax bracket at retirement. It’s best to work with your financial advisor to make these decisions, but here are some tips to get you started.
You need to determine if you qualify for a deductible IRA. Ideally, you would fit into this category if your company doesn’t offer a retirement plan or your annual income falls below specified IRA levels. However, if you don’t qualify for a deductible IRA, a Roth IRA is your best bet. The table below offers guidance on the two options.
“If you expect to be in the same tax bracket or lower, say at 28 percent to 15 percent, when you retire, the
deductible IRA comes out ahead,” explains Dunteman. “Although if you expect to be in a higher tax bracket, then the Roth is favored.”
For example, if you’re putting $2,000 a year into a deductible IRA and are in the 28 percent tax bracket ($25,750 to $62,450 annual income), the deductible IRA will provide you with $560 in tax savings today. Whereas, with the Roth IRA, you won’t get a tax deduction for the $2,000. However, that money will be available to you tax-free down the road.
Also, if you chose a deductible IRA, you will need to make sure that your anticipated retirement income won’t push you into a higher tax bracket. If it does, it will wipe out the advantage of having a deductible IRA, because you will have to pay taxes on the money as you withdraw it. The table below provides an example, by putting a dollar figure to each type of IRA.
“If you qualify for a deductible IRA, you will want to take advantage of it,” says Dunteman. “In fact, I haven’t seen a scenario yet where a Roth IRA beats a deductible IRA.”
“Either way you go, an IRA is a good way to diversify your investments,” he continues. “It’s an effective forced savings plan.”
Jack Robinson with RWA Financial Services, Austin, Texas, agrees. “We feel any type of business owner should have a retirement plan if it’s feasible,” he says.
Robinson explains that the biggest problem he has when working with farmers is the perception that farming is a way of life. “We stress that it should be treated like a business,” he adds. “You need to make this your livelihood and plan for the future, not just one year at a time.”
That involves a quarterly review of your business plan, with a major analysis done annually to see which areas have met your financial goals and which ones need adjusting. This includes your retirement plans. If your current strategy isn’t providing you enough income for the future, then you need to make some changes.
“Farming is a business and financial planning is an important part of that,” continues Robinson. “You need to be constantly aware of your long-term business plan and how it’s unfolding. You need to be aware of the things you can’t control, such as the weather, and understand the ones you can control to make your breakeven truer.” Remember, opening an IRA account is just one way to start securing your financial future. Getting started is usually the toughest part. One of the simplest ways to get comfortable with the idea may be to do some surfing on the Internet. There, you can research the different types of IRA’s and other potential investment options. Here are a few of Money magazine’s top Web site picks for financial information:
Yahoo finance www.finance.yahoo.com
Microsoft’s MoneyCentral www.moneycentral.com
When you’re ready to speak with someone about setting up an IRA, you have a lot of options of where to invest that money. If you want to choose from a variety of investment options, such as mutual funds, stocks and bonds, it’s best to contact a brokerage house. Meanwhile your local bank or credit union will offer more conservative investments, mostly with certificates of deposits. A financial advisor can help you decide what’s best for you and your family.
Which IRA is Right For YOU?
If you want to start setting money aside for retirement, or add another investment option to your portfolio, it's time to take a look at Individual Retirement Accounts. Both the deductible and Roth IRA's are good choices, but you need to decide which one, if either, fit into your financial goals.
Review the two options to determine if you fit into either category and can deal with the associated retrictions. If you are below or at the lowest income level listed, then you can deduct 100 percent of the amount invested. As your income rises, these tax deduction percentages phase out accordingly within the ranges listed below. Consult with your financial advisor to see where you fit in.
- Eligibility: Anyone with annual earned income less than: Single: $95,000 - $110,000; Joint: $150,000 - $160,000
- Maximum Annual Contribution; $2,000 or 100% of earned income, whichever is less, per person, per year.
- Contribution Date: By April 15 of following year.
- 10% Early Withdrawal Penalty: Yes, if under age 591/2 and withdrawal is not for higher education expenses, qualified first-home purchase, certain major medical expensesor certain long-term unemployment expenses.
- Tax-deductable contribution: No
- Mandatory withdrawals: No
- Contributions after age 701/2: Yes
Traditional (deductable) IRA:
- Eligibility: Anyone with annual earned income less than noted below, who is under the age of 701/2 (on Dec. 31 of the tax year): Single: $31,000 - $41,000;Joint: $51,000 - $61,000
- Maximum Annual Contribution: Same
- Contribution Date: Same
- 10% Early Withdrawal Penalty: Same
- Tax-deductable contribution: Yes
- Mandatory withdrawals: Yes (By age 701/2)
- Contributions after age 701/2: No
Source: MHM Business Services, Kansas City, Mo.