Could what you don’t know about IRAs hurt your retirement?
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Individual retirement accounts can be used as a tool which allows you to save money for retirement with tax-free growth or on a tax-deferred basis. But financial advisors say many who could benefit know little or nothing about this saving option.
TIAA’s fifth annual IRA survey found that 33 percent of American adults have an IRA. And only 41 percent of those who are not currently contributing to an IRA would consider one as part of their retirement strategy – a decline from 56 percent in 2015.
Cindy Wilson, a Pasadena, Calif.-based financial advisor at TIAA, discussed with FOXBusiness.com some of the differences among IRAs and the full range of benefits they offer. Here is what you need to know.
Boomer: What are some of the generally unknown benefits that an IRA provider can offer?
Wilson: An IRA can be more than just a place to invest your savings. Some IRAs offer access to helpful financial advice and an option to convert your savings into a steady stream of income in retirement. However, in our fifth annual TIAA IRA survey, we found that many Americans do not consider the range of benefits an IRA provider can offer when selecting one. A surprising 56% said there is no difference or do not know if there is a difference among IRAs.
But the fact is that many Americans are living longer in retirement, and retirement planning is often complicated. It is important that people take a big-picture view of their savings and investments. The professional advice that some IRA providers may offer can help you figure it all out — which investments are right for you, how much to put in each, and how to receive income in retirement.
Boomer: How can an IRA convert your savings into a stream of income in retirement?
Wilson: Many people focus on a lump sum of money they want to have saved before they retire, but a wiser approach is to think about how your savings will provide a steady source of income during retirement. The right IRA can help ensure you have the necessary funds to pay for the essentials, such as housing and medical care.
If you or a family member has worked for a nonprofit organization, you can invest in annuities through a TIAA IRA. Adding an annuity to your IRA can provide you with retirement income that you can’t outlive.
Boomer: When it comes to the understanding and involvement with IRAs, what are some of the generational differences?
Wilson: Our survey revealed an opportunity for Gen Y individuals to learn more about IRAs. Thirty-five percent who are not contributing to an IRA said they do not know enough about IRAs to consider using one, compared to 25 percent of respondents overall.
Gen Xers were more likely to say they don’t have enough money to save more than they already do. This group is often juggling multiple priorities and feels stretched to the limit. That’s why it’s important to keep in mind that choosing an IRA provider that offers advice can help you figure out a way to balance the need to save with other financial priorities.
An IRA provider that offers access to financial advice can also help individuals handle any extra income wisely. Our survey found that only 6 percent of respondents would contribute to an IRA if they had an extra $5,000 to spend or invest. About one-fourth said they would pay down debt or create or add to an emergency savings fund instead. But 30 percent would spend the money on home renovations, a vacation, technology upgrades or a shopping spree.
Boomer: What are some of the other unknown benefits of an IRA?
Wilson: An IRA can create flexible income options in retirement, and also offer tax savings and allow investments to compound over time. A Roth IRA can add tax diversification to a portfolio – pay taxes now, for tax free growth in a Roth IRA, or defer taxes now, and pay later with an IRA. Not enough people are aware of these benefits. Our survey found that only 33 percent of American adults have an IRA, and only 41 percent of Americans who are not currently contributing to an IRA would consider one as part of their retirement strategy.