Introduction:
Retirement planning can be a challenging task for the average person. There are many different investment options and types of accounts, each filled with shortcuts and terms like 401(k), IRA, and 403(b). It can be difficult to know what to do, but retirement plans don’t have to remain a mystery.
Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) is a personal retirement account. It comes in two basic forms, traditional and Roth. The differences between the two forms mainly revolve around when the account holder pays taxes on the funds.
For example, individuals who believe they will be in a higher tax bracket in the future choose the Roth account because they pay taxes now and then withdraw the funds tax-free in the future. Others may prefer the tax benefits now, so they opt for the traditional account and pay taxes on the funds later when withdrawn.
No matter whether you choose the traditional or Roth account, here are some things to understand about individual retirement accounts:
- An Individual Retirement Account is not an investment; it is merely an account. You can invest in stocks, bonds, ETFs, mutual funds, and more within this account. It is for one individual only. Your spouse or other family members must open their own Individual Retirement Accounts if they wish to have such retirement accounts. There are annual contribution limits. In 2021 and 2022, this limit is $6,000. Those over age 50 are allowed to save an additional $1,000 each year, raising the annual limit to $7,000. Your income affects eligibility for a Roth IRA. Generally, the higher your income, the more limited your use of the Roth IRA will be. The contribution limits for 2021 begin to phase out for individuals with an annual income of $125,000. Those earning $140,000 or more as individuals cannot contribute to a Roth IRA. Married couples filing jointly will find the phase-out begins when their combined annual income reaches $198,000 and completely stops at $208,000. For 2022, contributions are limited to individuals earning $129,000 or more, and those earning more than $144,000 are prohibited from contributing to a Roth IRA. The contribution limits for married couples filing jointly begin when their combined income reaches $204,000 and are completely excluded when their combined income reaches $214,000. Like other retirement accounts, early withdrawals (before age 59.5) are often subject to penalties. Unconventional investments, such as real estate, jewelry, and private business investments, may be available in the individual retirement account but come with additional complexities, and it is best to consult an expert regarding these options. The account’s performance depends on the performance of the investments within the account. Your money is not protected from market risks.
Insurance
The biggest advantage of having insurance is that it provides a source of guaranteed payment, whether on a monthly, quarterly, yearly basis, or as a lump sum. This is because insurance is a financial product (although some insurances include market exposure). Generally, during an economic downturn, retirement accounts composed of insurance will not feel the pain of economic contraction as severely as retirement accounts that rely entirely on investments.
Here are some facts about insurance:
- Insurance can be jointly owned. There is a broad range of insurance options to fit every income level, household size, and other financial circumstances. Some insurances may begin payouts within a year. Like other retirement options, insurances come with tax incentives and penalties for early withdrawal. Except for variable and indexed insurances, the returns on insurance are not affected by market conditions. Insurance often comes with higher fees and expenses than investment options within the individual retirement account. Insurances may be protected from bankruptcy or creditors in some states, just like individual retirement accounts or other retirement accounts.
Which one
Which is Better?
First, it’s important to understand that financial experts have vastly differing opinions. While some advisors praise annuities over individual retirement accounts, others strongly oppose them. Financial advisor Ken Fisher famously said, “I’d rather die and go to hell than sell an annuity.”
Despite Fisher’s strong stance, ordinary investors don’t have to make an either/or decision. You can own both! Many consider insurance products, such as annuities, as a way to safeguard money, while investment products, like individual retirement accounts, are deemed better for wealth building. Some people even choose to put some of their retirement account money into annuities, but before you do that, remember it may complicate account ownership restrictions or distribution schedules.
Generally, the closer a person gets to retirement, the more they become concerned with protecting their assets. Annuities might be more suitable for an individual or family that has fewer working years left.
If annuities help protect assets, you might wonder why Fisher has strong words against them. He reflects a common viewpoint that many annuities have excessively high fees. However, not all annuities use the same fee structure. Some annuities may offer reasonable fees that compete with investment options in an individual retirement account, but to be sure, it’s best to consult someone who knows the details of insurance and investment products.
You might choose an individual retirement account over an annuity, or vice versa, but there’s no reason not to own both, especially if you’ve maxed out contributions to other tax-advantaged retirement accounts.
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Sources:
- Source 1: Internal Revenue Service. “Traditional and Roth Individual Retirement Accounts.”
- Source 2: Internal Revenue Service. “Retirement Topics – IRA Contribution Limits.”
- Source 3: Internal Revenue Service. “Amount of Contribution to Roth IRA You Can Make for 2021.”
- Source 4: Internal Revenue Service. “IRS Announces Changes to Retirement Plans for 2022.”
- Source 5: Internal Revenue Service. “Retirement Topics – Tax on Early Distributions.”
- Source 6: Internal Revenue Service. “Frequently Asked Questions about IRAs – Investments.”
- Source 7: Internal Revenue Service. “Publication 575 (2020), Pension and Annuity Income.”
- Source 8: Ken Fisher. “Why I Still Hate Annuities: Here Are the Reasons Why These Investments Are a Ruse.”
Source: https://www.thebalancemoney.com/annuity-vs-ira-strategies-for-your-retirement-4163939
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