Maximizing Your Savings Potential: Understanding and Harnessing the Power of an IRA Account

Are you grappling with the best way to save for retirement? With the countless options available, it can be overwhelming! But not to worry, there is an option that often gets overlooked - the IRA savings account. This safe and interest-bearing account can be the perfect sidekick on your retirement journey.

For Bert Doerhoff, a wealth advisor at Aura Wealth Advisors, helping clients navigate the complexities and yields of retirement investment is a daily occurrence. Here, Doerhoff breaks down the advantages and characteristics of IRA savings accounts and answers a common query - "What is an IRA savings account, and how does it work?".

What is an IRA savings account?

Retirement planning can feel like a daunting quest, fitting for an epic sci-fi or fantasy movie - except there are no dragons, unfortunately. As you delve into this adventure, consider an IRA savings account as your trusty companion. It is a savings account that combines the dependable returns of a savings account with the tax benefits of an IRA.

Any money you deposit to an IRA savings account will count towards your annual IRA contribution limit, which is ,500 for individuals under 50 years old and ,500 for those older. Of course, certain limitations may apply, speaking to a financial advisor could help you understand these better.

Unlike an IRA CD account, an IRA savings account usually doesn't require any minimum deposit, making it an option for savers across all budgets. You can also make withdrawals from it, as opposed to an IRA CD account, without facing a banking penalty. However, withdrawing your funds before reaching the age of 59½ may lead to an IRS early withdrawal penalty.

Investing in an IRA savings account is unlike investing in the stock market or mutual funds, where fluctuations are centralized in the market. Instead, the IRA savings account returns a good interest rate that isn't bound to these stock market swings.

The 3 biggest benefits of an IRA savings account

It is paramount to understand how an IRA savings account operates as you look to establish a retirement savings strategy that aligns with your financial goals. Regardless of how far along you are in your retirement plan, remember the three core benefits of integrating an IRA savings account:

1. Security. Your money won't face losses in the event of a market crash, it will be there as and when you need it.

2. High interest rate. An IRA savings account is like a high-yield savings account, ensuring a solid interest rate.

3. Compound interest. With time, the power of compounding emerges, causing your money to grow at a faster rate.

And there are even more advantages to discover. As you explore how it works, it's worth examining the tax benefits linked to each type of IRA savings account, determining how it can bolster your retirement savings strategy. Keep reading to know more.

What are the tax benefits of an IRA savings account?

IRA savings accounts could be available through Roth IRA, Traditional IRA, or both, granting you access to the unique tax benefits of these savings avenues. Remember, early withdrawal from a Roth or Traditional IRA could attract an IRS penalty, depending on your plan type and the age you withdraw at. Talking to a tax advisor can help you analyze your situation better.

The question of whether to choose the Traditional or Roth IRA path has been debated for ages. According to Doerhoff, it all boils down to what you predict will happen at the end of your life. However, what truly matters is starting to save early for retirement and not the option you choose.

To determine the IRA savings account that suits you best, understanding the peculiarities of the Traditional IRA and the Roth IRA may be necessary.

The tax benefits of an IRA savings account within a Traditional IRA

Opting for an IRA savings account within a Traditional IRA may allow you to deduct the contribution from your income, reducing your tax bill. The money then grows tax-free until you withdraw it at retirement, at which you pay income tax on the disbursement.

Distribution of funds before the age of 59 and a half may attract an early withdrawal penalty from the IRS. Also, the Required Minimum Distributions (RMDs) are mandatory at the age of 70 and a half but 72 if you were 70 and a half by 12/31/2019. However, if you were 72 years old from 1/1/2020 to 12/31/2022, distribution will be required to start by age 72, and if you turned 73 in 2023 or following years, distribution will not be mandatory until you're 73.

The tax benefits of an IRA savings account within a Roth IRA

Although contributions to an IRA savings account within a Roth IRA cannot be deducted from your income, you won't be expected to pay tax on gains when you withdraw the funds in retirement.

Moreover, Roth IRA allows you to withdraw earnings without a penalty once your account is five years old and you're 59 and a half years old. However, when you pull the funds before attaining the age of 59 and a half, there's the possibility of being penalized by the IRS. The RMD rule that applies to Traditional IRAs doesn't apply to Roth IRAs. Therefore, you're not mandated to distribute earnings on attaining the RMD age in Traditional IRAs. This way, you can let your account grow without incurring taxes.

How IRA savings account can facilitate your retirement savings journey

By providing secure and steady returns that offer an alternative to the unpredictable stock market, an IRA savings account can be a strategic place to save for retirement. Doerhoff explains how an IRA savings account functions as you approach retirement.

Early use of IRA savings account during retirement savings journey

Inexperienced investors often make the mistake of investing their first savings in the stock market and panicking when the value drops. Doerhoff refrains from recommending it as the pain of watching investments lose value is usually more significant than the joy derived from watching it rise.

However, through a period of time, the usual portfolio mix often involves 60% equity and 40 % fixed income. Equity refers to stocks or shares of publicly traded companies, which are considered riskier than government bonds, corporate bonds, and IRA savings accounts that are fixed-income assets.

Rather than diving hurriedly into the unpredictable stock market, Doerhoff recommends testing the waters of an IRA savings account, which offers great flexibility and security with no minimum opening deposit, providing a good rate of return that is not tied to the stock market.

He advocates for the commencement of depositing funds into an individual retirement account (IRA) savings plan and letting it accumulate over time."