Traditional and Roth IRAs are convenient, tax-advantaged ways to increase your retirement savings and are popular for a reason. Both Traditional IRAs and Roth IRAs offer flexibility and allow you to withdraw money whenever you want, unlike employer-sponsored retirement plans. These accounts are also insured to an additional $250,000 by the NCUA.
Traditional IRA contributions are tax-deductible that reduce the amount of current federal income tax you pay. Distributions from your Traditional IRA are usually taxable. If you are 59½ or older, or if another exception applies, distributions will be taxed at your regular income tax rate. An additional tax of 10% may apply to distributions made before age 59½. Traditional IRAs have Required Minimum Distributions (RMDs) starting at age 70½.
Roth IRA contributions are not tax-deductible. But, future earnings and capital gains accumulate tax-free. Like the Traditional IRA, your investments in a Roth IRA are tax free as long as it remains in the account, maximizing the potential compounded return. Distributions from your Roth IRA may be tax free if your account has been open for five years or more and you are 59½ or older (or another exception applies). An additional tax of 10% may apply to distributions of earnings made before you are 59½, unless an exception applies. With a Roth IRA, there are no Required Minimum Distributions (RMDs).
Coverdell Education Savings Account
Coverdell Education Savings Accounts (ESA) are a type of savings account that can help you save for your children’s (or grandchildren’s) education expenses. With a Coverdell, you can make annual contributions per child until the child reaches 18 years of age. Investments can be withdrawn to pay for qualified education expenses while the child is enrolled in an eligible educational institution, including elementary, secondary, or post-secondary schools. Withdrawals are tax free. Qualified expenses include:
- Room and Board