Building Financial Security for Your Golden Years
Ensuring adequate income during retirement is essential for covering your living expenses. BFCU IRAs can help members save for retirement or pay for a college education. Incorporating an Individual Retirement Account (IRA) into your overall retirement strategy is an effective way to strengthen your financial readiness during your season of leisure.
Understanding IRAs
An Individual Retirement Account (IRA) represents a specialized retirement savings vehicle that provides valuable tax benefits. The two primary types available are Traditional IRAs and Roth IRAs. Since each type offers unique tax advantages and features, careful comparison is essential when making your selection.
Key Distinctions Between Account Types
Both Traditional and Roth IRAs enable tax-advantaged growth of your retirement savings, but they differ in important ways. The comparison chart that follows serves as a helpful reference tool for understanding these differences. Given the complexity of tax implications, we recommend consulting with a qualified tax advisor to determine which option best aligns with your specific financial objectives. Please note that the following is for informational purposes only and is not intended as advice.
IRA Distinctions
| Features |
Traditional IRA |
Roth IRA |
| Primary Features |
The earnings are tax-deferred until withdrawn and for many taxpayers, the contributions made are tax deductible. |
All qualified distributions (defined as withdrawals allowed from the plan without penalty) are tax-free. |
| Contribution, deduction, and income limits |
These limits are published annually by the IRS. |
These limits are published annually by the IRS. |
| Tax Advantages |
Traditional IRAs are tax deferred. You do not owe taxes on any earnings until you make a withdrawal. If you qualify, you may be able to deduct your contributions to a Traditional IRA on your federal income tax return, depending on tax-filing and active-participant statuses, as well as income amount. Earnings grow on a tax-deferred basis and are added to taxable income for the year distributed. |
Contributions to a Roth IRA are not tax deductible. Earnings grow tax deferred. A qualified distribution from a Roth IRA is tax-free. Earnings are tax-free if you have had an account for five
years and one of the following applies:
After age 59 ½, Death, Disability, First-time home purchase (up to $10,000.00) |
| Age for required distributions |
Mandatory distributions must begin by April 1 following the year you reach age 73. Beneficiaries are also subject to this rule. |
Distributions are not required during your lifetime. |
| Withdrawal penalties |
There is a 10% IRS penalty on withdrawals prior to age 59 ½ except for withdrawals due to: Death, Disability, Pre-59 ½ periodic payments, Qualifying medical expenses, Health insurance premiums while unemployed, Withdrawals up to $10,000.00 toward the purchase of a first home, Conversion to a Roth IRA, Higher-education expenses. Additional penalties from BFCU may apply. The portion of a withdrawal that is the return of nondeductible contributions is not subject to penalty. |
There is a 10% penalty applied to the earnings portions prior to age 59½ except for withdrawals due to: Death, Disability, Pre-59 ½ periodic payments, Qualifying medical expenses, Health insurance premiums while unemployed, Withdrawals up to $10,000.00 toward the purchase of a first home Higher-education expenses.
Withdrawals of after-tax contributions are not subject to penalty. |
| Conversion Options |
A Traditional IRA can be converted to a Roth IRA if your income is within IRS limits. The amount converted is included in taxable income for the year. |
A Roth IRA cannot be converted to any other kind of IRA.
|
Coverdell Education Savings Account (ESA)
While focused on education rather than retirement, the Coverdell Education Savings Account is another tax-advantaged savings option worth considering as part of your comprehensive financial planning. Previously known as an Education IRA, this account allows you to contribute up to $2,000 annually per beneficiary for qualified education expenses. Contributions are made with after-tax dollars, but earnings grow tax-free and withdrawals for eligible educational costs are also tax-free. Coverdell ESAs can be used for elementary, secondary, and higher education expenses, making them a versatile tool for families planning ahead for educational costs while building their overall financial foundation.
You can choose from two great Coverdell Savings Account options
- Share Savings Account
- Fixed-Rate Share Certificate Account
Both accounts earn competitive rates and can be opened with minimal deposit. Please see our Rates Page for further information. As with all tax-advantaged products, it is recommended that you consult a tax professional in determining if a Coverdell ESA is right for your goals.
For more information or to start a Traditional, Roth IRA Coverdell Education Savings Account, stop by a branch or contact a Member Service Representative.
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