Financial Health for Women (Part 2 of 3)

Guest Contributor: KristiLyn Wilkinson, M.S.
USU Extension Empowering Financial Wellness Program Manager

Welcome back to Part 2 of 3 in this series of financial health for women and “working out” your retirement! If you read Part 1, I know you are anxiously waiting in your stretchy pants to jump right in, so here we go! 
What is an IRA? IRA stands for individual retirement account. There are two kinds of IRA’s, the traditional and Roth. I will break each of these down so you can decide which one is best for you. 
​Click "Read More" below to keep reading!

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First, a few housekeeping items to discuss. Who can open an IRA? Anyone with earned income can contribute to an IRA. If you are currently a stay-at-home mom without any earned income you can open what is called a spousal IRA. Can I get a hallelujah that the government acknowledges the importance of unpaid work that is done in the home! To open a spousal IRA, you must be married and file a joint tax return. Second, how much money can you contribute to an IRA? For tax year 2020, you can contribute up to $6,000 ($7,000 if you are 50 or older).  Note-if you make a lot of money the government reduces the amount you can contribute to an IRA, but for most people these income limitations aren’t an issue. 

The main difference between a Roth and a traditional IRA is when you pay your taxes. With a traditional IRA, you can deduct your contributions on your tax return now, and you will pay tax on the money when you withdraw it during retirement. With a Roth, the money you put in now is post-tax so there is no tax break now, but the money grows tax-free and when you withdraw the money you don’t have to pay any taxes on it! Here are some important distinctions between a traditional and Roth IRA. You can find more detailed information at IRS.gov by typing IRA into the search bar. 

Traditional IRA:

• Money is invested pre-tax, so it lowers your taxable income right now.
• The government requires you to start withdrawing money from your IRA when you are 70 ½ (they want you to start paying taxes on that money).
• If you withdraw money from a traditional IRA before age 59 ½ you will pay taxes and a 10% early withdrawal penalty UNLESS you use the money to pay for qualified first-time homebuyer expenses, qualified higher education expenses, or for hardship/medical expenses. 

Roth IRA:

• Money is invested post-tax, so there is no tax-break now, but you can withdraw the money tax free at retirement.
• There is no minimum age the government requires you to start taking distributions (you already paid taxes on the money).
• The money you contribute to the Roth is always yours, so you can access it at any time, penalty and tax-free. (People like to use these for longer term emergency savings accounts because they can potentially get a higher rate of return and still have access to their money). 

Basically, Roth IRA’s are the bee’s knees- so you should have one, and be contributing to it, even if it’s only $10 a month! Stay tuned for Part 3 of 3 where we will talk about how to open an IRA and make contributions. 
Read Part 3 here