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Making financial sense of retirement accounts

Saving for retirement isn’t easy when it feels like a lifetime away, but those who save early will reap the rewards. Starting at an early age can enable workers to enjoy their golden years full of beach days, golf games and trips to Vegas — a financially secure retirement.

Most employees rely on a company retirement plan — most commonly a 401(k) — to save for retirement while enjoying tax benefits. But there are other options. Individual retirement accounts or IRAs can play an important role.

Knowing the difference between a traditional IRA and a Roth IRA will help you determine your plan.

IRA similarities

Both traditional and Roth IRAs give workers the opportunity to save for retirement and receive tax benefits. They both have penalties for withdrawing earnings before age 59 1/2. As of 2018, traditional and Roth IRAs have an annual contribution limit of $5,500 ($6,500 for taxpayers, ages 50 and older).

Traditional IRA

Traditional IRAs are tax-deferred, meaning earnings are taxed once they are withdrawn in retirement. Any contributions you make are tax deductible as long as you meet income limits. Once you reach age 70 1/2, you must withdraw a required minimum distributions from the IRA on an annual basis and pay income tax on this, until your funds are exhausted or until death.

Roth IRA

Roth IRAs have the advantage of tax-free growth. Contributions are made with after-tax money and are not tax deductible. Because you’ve already paid taxes on these funds, your contributions can grow for years and be withdrawn without paying any income tax. A Roth can continue to be funded at any age as long as you have taxable compensation, and there are no requirements for minimum distributions per year. However, Roth IRAs have income restrictions ($133,000 for those filing single and $196,000 for those filing jointly) so they are not available to everyone.

What’s right for me?

Before you decide on any IRA, take a look at your employer-sponsored plan. Your first priority should be to fund your 401(k) to maximize employer-matching contribution. If your employer matches 3 percent of your 401(k) contribution, do your best to ensure you are contributing 3 percent.

Next, consider your tax situation and savings goals. Younger workers will enjoy the benefits of a Roth IRA because their tax bracket is lower than what it will likely be in the future. Roth IRAs also protect against an increase in the federal tax rate. Since there is no required minimum distribution, a Roth IRA is a great way to preserve tax-free assets for your beneficiaries.

A traditional IRA may work better if you’re looking to lower your taxable income. If you’re in a high tax bracket and expect your tax rate to decrease after retirement, the tax-deferred structure of a traditional IRA makes sense.

There’s no reason you can’t have both a traditional and Roth IRA — many people do. However, your total contributions to both accounts are still capped at $5,500 annually ($6,500, ages 50 and older). Check with your financial advisor to see which IRA makes the most financial sense for you.

David Kimura is the CUSO Financial Services LP (CFS) investment program manager for Hawaii State Investment Services at Hawaii State Federal Credit Union providing investment, retirement and financial planning services to members. He can be reached at or (808) 447-8083.

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