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Americans are saving less. According to the Federal Reserve, savings rates are down to 4%, down from over 10% in the 1970s. In the face of rising costs of living, younger Americans in particular are putting less away for retirement. 

While Social Security can help older Americans avoid the worst outcomes, it is often not sufficient to keep up with your lifestyle and expenses. In fact, according to the Social Security Administration, it’s only meant to replace about 40% of your income.

Individual retirement accounts (IRAs) can help you prepare for income gaps later in life, as well as provide tax savings and a financial cushion as you face increasing health care costs, while offering more robust growth than most standard savings accounts. In this post, we’ll explore the ins and outs of individual retirement accounts, answering common questions, providing details on tax benefits and rules surrounding contributions and withdrawals, as well as information on how to open one. Keep reading to learn more!

What is a retirement account? 

While you can make plans to provide yourself with retirement income in a variety of ways—from purchasing investment properties to saving in a personal savings or money market account—retirement accounts are specially-designed vehicles to facilitate retirement savings. To encourage their use, the federal government has provided special tax incentives for contributions and/or withdrawals, making them a beneficial tool for preparing for retirement.

Common retirement accounts include: 

401(k), 403(b) and 457(b) Accounts: An employer-sponsored retirement savings plan where employees can contribute a portion of their salary, often with employer matching. Self-employed individuals and small business owners without employees may utilize Solo 401(k)s.

IRAs (Individual Retirement Account): A personal retirement account that allows individuals to contribute a certain amount annually with tax advantages, either traditional (pre-tax) or Roth (after-tax). Small businesses and self-employed individuals may also consider SEP IRAs (Simplified Employee Pension) and SIMPLE IRAs (Savings Incentive Match Plan for Employees).

Keogh Plans: A tax-deferred retirement plan for self-employed individuals and unincorporated businesses.

Pension Plans: An employer-sponsored retirement plan where employees receive a fixed income during retirement, based on factors like salary and years of service.

What is an IRA? 

An IRA or individual retirement account is a specialized savings vehicle, usually created independently through your financial institution or investment management company. Like 401(k)s, there are annual contribution limits for IRAs, as well as specific tax regulations that depend on the kind of IRA you are contributing to (more on this later). 

IRAs are meant to provide income in retirement. You must wait until age 59 ½ to make withdrawals under normal circumstances, or your withdrawal will be subject to a 10% penalty by the IRS. However, certain hardships may allow you to avoid this fee, including some unreimbursed medical expenses, qualified higher education expenses, specific expenses for qualified military, and up to $10,000 to purchase your first home.

Are there contribution limits to an IRA? 

Just like a 401k, there are limits on how much you can contribute each year to your IRA and limits often change on a yearly basis.

For the tax year 2023, the highest annual contribution limit for all your IRAs combined is $6,500 if you're under the age of 50 and $7,500 if you're 50 or older. In the tax year 2024, the limits are $7,000 for those under the age of 50 and $8,000 for individuals aged 50 or older. 

What is a traditional IRA? 

A traditional IRA is a form of IRA that may allow you to make your contributions “pre tax.” This means that you may not be liable for the taxes on the income you use to make your contributions, resulting in a tax deduction the year you make your contributions. Contributions can be made up to the Tax Day for that tax year. Contributions for tax year 2023 can be made up to April 15th, 2024. 

While traditional IRA contributions are often not subject to tax, your withdrawals in retirement are. For many, this means that you can take advantage of reduced income tax during higher-earning working years when income taxes may be more substantial. 

Things to Know About Traditional IRAs 

Withdrawals for traditional IRAs are subject to income tax, as long as you have sufficient income for you to have a tax liability. 

As mentioned above, withdrawals cannot be made before age 59 ½. However, once you reach 72, you are required to begin making withdrawals. Rules around these withdrawals, called “required minimum distributions,” can be complex, but your accountant or wealth manager can assist you to ensure you are following the requirements. The IRS’s Required Minimum Distributions (RMDs) page also provides details and worksheets to help you better understand the process. 

Tax deductions are based on two factors: your income and whether or not you or your spouse has a retirement plan at work. You may not be eligible to deduct your full contribution if you or your spouse is covered by an employer-sponsored plan. For more information about possible deduction limits, visit the IRS’s page IRA Deduction Limits. 

What is a Roth IRA?

A Roth IRA is a type of IRA where your contributions are made “post tax.” In other words, contributions won’t qualify you for a reduction in your tax liability the year you make them, as contributions made to a traditional IRA would.

So, without this upfront tax savings, why would you choose to have a Roth IRA over a traditional IRA? Because when you reach retirement, you won’t pay taxes on your IRA withdrawals. This is beneficial when:

• You predict your income will be higher in retirement
• Your income will be similar, but you’ll have fewer deductions in retirement
• Your federal income taxes are negligible today, and the tax deduction isn’t meaningful

Things to Know About Roth IRAs 

To qualify for contributing to a Roth IRA, a single individual's Modified Adjusted Gross Income (MAGI) should not exceed $153,000 for the tax year 2023 and $161,000 for the tax year 2024. For married couples filing jointly, their MAGI must be below $228,000 for tax year 2023 and $240,000 for tax year 2024.

Unlike 401(k)s and traditional IRAs, Roth IRAs do not require withdrawals once you reach 72. 

How many retirement accounts can you have? 

There is no limit to the number of retirement accounts that you have. The only caveat is, as we discussed above, there is a cap on your contributions to certain accounts each year, including IRAs and 401(k)s. In fact, having a diverse selection of retirement accounts can help set you up for a successful retirement.

Even if you already have an employee-sponsored retirement plan, consider the benefit of other accounts to maximize your retirement income—as well as your tax savings. For instance, contributing to a Roth IRA can allow you to receive nontaxable withdrawals in your retirement as needed, ideal for when you require an income boost in a given year. 

How to Open a Traditional or Roth IRA 

Opening an IRA is simple, and you can open one at any time as long as you have earned income. IRAs can be opened through a wealth manager, investment firm, or financial institution, as well as at many local bank branches. Pennsylvania residents can quickly and simply open an IRA in person with Citizens Savings Bank.

When you open an IRA, you’ll need:

• Your full name, address, and phone number
• Your Social Security Number
• Driver's license number
• Date of birth
• Beneficiary information including their full name(s), address(es), phone number(s), and Social Security Number(s) 
• Employer information
• Initial deposit (if required)

You may also need to be prepared to answer questions about your preferred risk, as IRAs may contain numerous investments. Remember, when you open an IRA locally, a knowledgeable professional can help you navigate these decisions.

Open an IRA Today at Citizens Savings Bank 

At Citizens Savings Bank, we offer both Traditional and Roth IRAs. Our team of experienced investment specialists can assist you in weighing your options, understanding your tax benefits, and choosing the right account for your needs.

Learn more about IRAs by visiting our website, or contact us at one of our local branches throughout Northeastern PA in Scranton, Mount Pocono, Taylor, Clarks Summit, or Honesdale to set up an appointment to open your IRA today.

Citizens Savings Bank has multiple locations throughout Lackawanna, Wayne, and Monroe Counties. For branch locations and hours, visit our website. We also have a Customer Support Team ready to answer any questions you may have. Call us today at 1.800.692.6279 or email [email protected]. Member FDIC.