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True or false: When you contribute to an IRA, there's no way to access the funds until you retire. Stick around for a minute and I'll get you the answer.
When it comes to saving for retirement, there is a LOT of information out there, but also a lot of misconceptions.
One common thing you'll hear is that you can't have a 401k and contribute to an IRA. Actually, you can open a Traditional or a Roth IRA even if you already contribute to an employer-sponsored retirement plan. This may help you save more than you could in your company plan alone. You may want to discuss this option with your tax advisor since participation in an employer plan may impact tax deductibility in a Traditional IRA.
You'll also hear that IRAs are not flexible, and that you can't touch the money. While we recommend that you save the money in your account for retirement, there are circumstances in which an early withdrawal may be necessary. For example a first-time home purchase, qualified higher-education expenses, or a disability, may allow you to avoid the 10% IRS early-distribution penalty. However, Traditional IRA withdrawals will still be taxed as ordinary income.
For Roth IRAs, since taxes are paid up front, you can withdraw contributions at any time without penalty and without incurring additional taxes. Consult with your tax advisor before you withdraw any money from your IRA to see the impact it will have on your finances.
Another thing you may hear is "I earn too much money to contribute to an IRA" or "I don't make enough money to start an IRA." This misconception is not uncommon. The thing is, you can contribute even if you make too much for the contribution to be deductible, or if you make too little to make the maximum contribution.
There are lots of ways to start funding your IRA. Maybe it's just a few dollars each month and gradually increasing the contributions over time. Or maybe it's bigger one time contributions like a portion of your tax refund or bonus check.
The key is to start saving as much as you can, as soon as you can.
It's also common for stay-at-home parents to think that they can't contribute to an IRA if they don't have any earned income. But it turns out the IRS allows a non-working spouse to open an account and make contributions based on their spouse's income, as long as they file a joint tax return. It's possible to open a traditional IRA or a Roth IRA, as long as you meet eligibility requirements.
So, is there really no way to access the money in your IRA before you reach retirement age? The answer is false. You can access your money, so there might actually be more flexibility than you thought. Just remember - any withdrawal can impact your retirement savings going forward.
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Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meet other requirements. Both may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59½. Wells Fargo Advisors is not a legal or tax advisor.
Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options are different and may have distinct advantages and disadvantages.
When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distribution begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. Wells Fargo Bank, N.A. is a banking affiliate of Wells Fargo & Company.
This video has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. The accuracy and completeness of this information is not guaranteed and is subject to change. Since each investor’s situation is unique you need to review your specific investment objectives, risk tolerance and liquidity needs with your financial professional(s) before a suitable investment strategy can be selected. Also, since Wells Fargo Advisors does not provide tax or legal advice, investors need to consult with their own tax and legal advisors before taking any action that may have tax or legal consequences.