Several different instruments are available for retirement savings. Many New Jersey residents have a 401(k) or 403(b) through their employers. Recently, the idea of automatic IRAs has been gaining ground. They provide important advantages for small employers. They’re also very accessible should an employee become disabled.
The basics of IRAs
Congress created the traditional IRA, or individual retirement account, in 1974. Traditional IRAs are a pre-tax savings instrument, meaning that the depositor does not pay tax on the money as it’s going into the account. Taxes are paid when the money is accessed later.
For a Roth IRA, the opposite is true. Created in 1998, the Roth IRA gives workers an option to reduce their tax burden in retirement. People pay their taxes up front as money is deposited into the account. Later, the withdrawals for retirees are tax-free.
One benefit of IRAs is that there are many circumstances in which an early withdrawal is possible. These include going back to school, building or purchasing a home, and even cases of long-term disability. In effect, they can be a great form of private long-term disability insurance.
Automatic IRAs are on the way
States like Illinois are starting to administer IRAs. These are available for workers throughout the state. Small employers who can’t afford to offer pensions or 401(k)s can provide these to employees instead. Fees are the responsibility of the saver, but the large number of savers keeps them low. New Jersey, too, has passed a law making automatic IRAs a reality.
When planning for retirement, it’s always a good idea to consult with estate planning professionals. These include accountants, financial advisors and even lawyers. While this will be an up-front expense, it can make things smoother should someone pass away or become disabled.