Why the Smartest Retirement Savers Have an IRA

By Dan Caplinger Markets Fool.com

It always pays to take advantage of tax breaks when they're available, and IRAs give retirement savers the ability to produce dramatic tax savings. Whether you choose a traditional IRA for immediate tax deductibility or a Roth IRA for tax-free, long-term growth, using an IRA in your retirement planning can leave you with more money in your pocket at the end of your career. In fact, there are many advantages that IRAs have even over other tax-favored accounts that make them a must-have for your retirement planning.

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1. IRAs give you complete flexibility

Ask anyone what the biggest negative about their 401(k) plan at work is, and they'll probably tell you that the investment options they have available stink. Many plans don't offer a wide range of investment choices, instead sticking with a menu of vanilla mutual funds. Some of those fund options have extremely high fees, sapping the savings power of your retirement plan and costing you tens of thousands of dollars in lost expenses over the course of a career.

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By contrast, having an IRA lets you invest in nearly anything you want. Whether you like individual stocks and bonds, exchange-traded funds, mutual funds, or even some more exotic investments like gold bullion or real estate, IRAs can give you the investment exposure you want. Moreover, you can choose the lowest-cost options in implementing your investing strategy, and that can save you thousands that would otherwise have gone to financial providers.

2. You don't need your employer's cooperation to save in an IRA

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No matter how much you make or what other options you have for retirement saving, you can always open an IRA. The only requirement is that you earn enough income to cover whatever you contribute, up to the maximum allowable contribution for that particular tax year.

Some will point out that not every type of IRA is always available. Those over age 70 1/2 can't contribute to a traditional IRA. Roth IRA contributions are subject to income limits, and if you have income above those thresholds, you can't directly fund a Roth IRA. Moreover, other income limits affect your ability to deduct contributions to traditional IRAs.

However, as long as you're under the age limit, you always have the option of a nondeductible traditional IRA, and under certain circumstances, you can combine a nondeductible IRA with a Roth IRA conversion to provide a back door into a Roth. Moreover, for those who don't have access to any retirement plan at work, the IRA can be your best and only shot at a tax-favored way to retire.

3. IRAs can go on long after you're gone

Despite their name, IRAs aren't just for retirement. They can also help you with estate planning, because heirs can inherit an IRA and stretch out distributions over long periods of time.

When you inherit an IRA, you generally have to start taking distributions from the account within a certain set period of time. However, most people have the option of stretching out those distributions throughout their lifetimes. By doing so, you can extend the tax benefits of the IRA for another entire generation, and that keeps the tax man at bay for decades longer than would otherwise be possible.

4. IRAs let you manage your taxes

One of the biggest advantages of IRAs comes after you retire. At that time, you can manage the tax implications of IRA withdrawals to minimize your tax bill over time. For instance, if you have a mix of traditional and Roth IRA assets, you can customize your withdrawals to produce the desired amount of taxable income. Traditional IRA withdrawals get included in your taxable income, but most Roth IRA withdrawals do not, and that provides the flexibility you need to match up your finances with the tax bill you're aiming to pay each year.

Smart investors use IRAs so that they can plan their retirement better. With all these advantages, you should take a closer look to see how an IRA could help you with your retirement planning.

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