How an IRA Could Help Boost Your Retirement Beyond Social Security

How an IRA Could Help Boost Your Retirement Beyond Social Security
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We’ve reported many reasons why you should not rely solely on Social Security to fund your golden years.

Those reasons are in addition to the official advice that Social Security is only designed to replace about 40 percent of your pre-retirement income. Which naturally might get a retirement saver to think: “What about the other 60 percent?”

Enter the Individual Retirement Account, or IRA

According to Investopedia, an IRA is “a tax-advantaged account that individuals use to save and invest for retirement. The Internal Revenue Service (IRS) also uses the term individual retirement arrangements.”

According to Fox Business, “most people” should be making the most of an IRA to support their retirement. Of course, not every saver uses one.

But maybe every retirement saver should consider making use of an IRA. The same Fox piece explains 3 possible reasons why:

  1. An IRA can help fill the income gap between your Social Security benefit and what your pre-retirement income was. According to Motley Fool, if you were to file for benefits at age 71, the average maximum Social Security payment is $1,627 per month. Not many people can live on that by itself.
  2. An IRA can help you start retirement earlier. You can start withdrawing funds from an IRA penalty-free at age 59 ½ .
  3. An IRA can help you file for Social Security benefits closer to maximum retirement age. The longer you delay before filing for your Social Security benefits, the higher they become – so stretching out the period between your retirement and your filing boosts your potential Social Security payment closer to the maximum.

The Fox article concludes:

If you stand a decent chance of living a longer-than-average life, it will be worthwhile to delay starting to collect Social Security as long as you can – ideally until age 70.

That’s a long time… Fortunately, an IRA can helps to fill in the gaps in your retirement plan come from the tax savings they provide.

Traditional and Roth IRAs Have Tax Benefits Too

A Traditional IRA has some tax deduction benefits that can be considered. For example, your contributions are tax deductible (with certain IRS marital status and income limitations). The Tax Act blog shared one hypothetical example of what that can mean:

If you make $50,000 per year and contribute $5,000 to your Traditional IRA, your taxable income is actually $45,000… If you are in the 28 percent Federal tax bracket and contribute $5,000 to an IRA that year, multiply $5,000 by .28. That equals $1,400 and is the amount you won’t owe in taxes that year.

On the contrary, Roth IRA distributions are tax deductible according to a different set of complex IRS regulations. You can also keep the funds you’ve contributed to your Roth as long as you live, and contribute to a Roth IRA even after age 70 ½.

Investopedia explains yet another tax benefit of Roth IRAs when it comes time to take a withdrawal (at age 59 ½ or later):

Withdrawals of earnings work differently. The IRS considers a withdrawal to be “qualified”—and thus tax-free and penalty-free—if you’ve had a Roth IRA for at least five years.

If a retirement saver can take a withdrawal from their Roth IRA without having to pay more taxes on it, that can mean having more spendable cash when it’s needed.

Of course, if you want to protect your retirement, secure your purchasing power, and fully diversify your portfolio, there is one more kind of IRA to consider.

Consider a “Non-Traditional” IRA to Boost Your Retirement

As retirement savers look for ways to diversify their savings beyond stocks and bonds, physical precious metals continue to grow in popularity. Unfortunately, you can’t add gold bullion or silver coins to the typical Traditional IRA or Roth IRA. That’s where the “self directed” IRA shines.

The biggest difference between a conventional IRA and a self-directed IRA is in who makes the decisions: with an SDIRA, you have much more control of your investment decisions. (Getting lost in the alphabet soup of retirement accounts? Here’s a side-by-side comparison of the different types.)

Along with this greater amount of control, a self-directed IRA also provides flexibility with your investments. You are not restricted to traditional paper assets. Your retirement savings will no longer be limited to a broker’s menu of mutual funds.

With a self-directed IRA, you diversify your retirement savings by adding physical gold, silver, or other precious metals. In addition to the benefits of diversity, your savings will have the additional stability and security associated with physical precious metals.

2021, IRA, retirement savings, social security