What's an IRA Anyway?

Whenever I hear the question “So, what is USAA’s IRA paying?” I know it’s time to take a step back and get to understand the member’s needs and investment experience. After all, an IRA is not an investment in itself.

By Brad Van Alstyne

The Individual Retirement Account designation is a title you add to an investment to get a tax privilege. First you have to decide how you want to invest your money, then — and only then — you label that investment as an IRA.

IRAs can be incredibly complex, but at the same time very easy to understand. I get a lot of questions from members about them, and here are some answers in a nutshell.

Who can open an IRA?teller advisor

Pretty much anyone with a job can put up to $5,000 a year into an IRA. If you’re over 50, you can contribute $6,000. Remember though, you or your spouse must have “earned income” in order to use an IRA. There are also some tax deduction limits and eligibility requirements based on your income, so make sure you review these with a licensed financial professional before you open an IRA.

What’s the difference between a traditional and a Roth IRA?

Basically, it’s all about the tax benefits and when you want your tax break.

  • Use a traditional IRA if you want a tax deduction this year and expect to be in a lower tax bracket when you retire. With this option, take into consideration, tax rates may go up before you reach retirement age.
  • Use a Roth IRA if you don’t need or want a deduction this year, expect to be in the same or a higher tax bracket when you retire and want your money to grow tax-free. There are some eligibility restrictions with a Roth. Check to make sure you’re eligible.

What types of investments are there?

The most common IRA vehicles are CDs, mutual funds and annuities. I like to use the word “vehicle” because it lends well to an example I like to use. I tell people that an IRA is like a car, you can put any kind of engine you want into a car and it will go as fast as the engine you choose. A “safe” engine goes slow while an “aggressive” engine can go much faster but can be more damaging if you crash.

What are the steps to opening an IRA?

There are just four simple steps to get started. Please note that it’s advisable to meet with a financial professional before opening an IRA to see which IRA is best for your particular situation.

  1. Decide whether you need a traditional or Roth IRA.
  2. Choose an investment vehicle.
  3. Open the appropriate account.
  4. Contribute some money.
Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Request a prospectus containing this and other information about the funds. Read it carefully before investing. This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional. Investing in securities products involves risk, including possible loss of principal. Investments/Insurance: Not FDIC Insured • Not Bank Issued, Guaranteed or Underwritten • May Lose Value
There are costs associated with annuities, including surrender fees, early withdrawal penalties and mortality risk expenses. Annuities do not provide any tax-deferral advantage over other types of investments within a qualified plan. USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.

 

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