An IRA is one of the best ways to help save for retirement. It's a tax-advantaged investment account that can hold stocks, bonds, mutual funds, ETFs, and more. Even better, any earnings you make from your contributions can be either income tax-free or tax deferred, depending on the type. Many financial professionals estimate that you could need anywhere between 70 to 85 percent of your pre-retirement income when you retire (depending on your lifestyle) and that an employer-sponsored savings plan like a 401(k) alone might not get you there. For some, an IRA lets you contribute to a 401(k) at the same time to help you build the nest egg you may need.
There are two basic types of IRAs. Depending on which type of IRA you use, it can either reduce your current tax bill now or when you retire.
With a Traditional IRA, contributions are made before taxes have been taken out and any earnings will be tax deferred.1 Once you start withdrawing money in retirement, you'll pay taxes at your current income level. Keep in mind, the IRS requires you to withdraw a minimum amount each year (required minimum distributions, aka RMDs) when you turn 72.2
With a Roth IRA, your contributions are made after taxes have been taken out. So unlike a Traditional IRA, once you start making qualified withdraws in retirement, they will generally be income tax-free.3 Plus, a Roth IRA has no required minimum distributions so you have the flexibility to choose when you want to withdraw your money or continue to let it grow.
Changing jobs? A rollover IRA could be a good move, too.
Typically, people use a rollover IRA when they change jobs. But it can also apply if you have multiple IRAs (or other similar retirement accounts) that you want to combine into one account. A rollover IRA lets you move the funds from your old 401(k), 403(b), or IRA while still maintaining the tax-deferred status. There's no limit to how much you can roll over into an IRA from other qualified accounts. However, there are annual contribution limits.
The good news is that by law, you must be given at least 30 days to decide what to do with your 401(k) when you switch jobs. To figure out the best strategy for your situation while minimizing your tax burden as much as possible, talk to one of our financial advisors.
Get matched with a financial advisor in four easy steps.
The Northwestern Mutual difference
Top 5 ranked investment service
We're one of the top U.S. Independent Investment Broker-Dealers.4
5.0M+ clients at Northwestern Mutual
The number of people we're proud to call clients, and who put their trust in us.5
164+ years strong through depressions, downturns, and pandemics
The number of years we’ve been there for our clients—through depressions, downturns, and pandemics.