IRAs: Types of retirement accounts

Whether you’re planning to retire in a couple years or a couple decades, one of the plans you should consider right now is an Individual Retirement Account (IRA). For many retirement savers, a Discover^® IRA Certificate of Deposit (CD) or Discover IRA Savings Account may be the right solution. An IRA can be vital to your retirement financial future. Financial planners believe you should start contributing to an IRA as early as possible in your career, then maximize your contributions each year.

Discover IRAs make that easy to do. For example, you can rollover assets to a Discover IRA CD or IRA Savings Account from an old workplace retirement account or another IRA. You also have your choice of contributing to either a Traditional IRA or Roth IRA. Additionally, if your company offers a retirement plan, you should talk to your tax professional about how much you should contribute and if you should take advantage of any matching funds.

It’s never too late to start saving

First, decide at what age you’d like to retire – then determine how much money you’ll need each month to maintain your lifestyle. Online IRA savings calculators can help you figure out how much money you’ll need to live comfortably. Then, just start saving! The easiest way is to have money taken out of your paycheck or bank account and deposited directly into your company’s 401(k) plan and/or into an IRA account. There are a few types of retirement accounts you can choose from.

There is no minimum deposit required to open a Discover IRA CD. You have 60 days to fund the account after opening the IRA CD. We offer flexible terms ranging from 3 months to 10 years, and deposits are FDIC-insured up to $250,000 per depositor, per account ownership category. There are two types of IRA CDs: Traditional and Roth. Which one you select depends on your age, income, and if you’re enrolled in your employer’s plan. You should consult a tax advisor to figure out which type is best for you.

Similarly, a Discover IRA Savings Account also has no minimum opening deposit requirement. You also have 60 days to fund the account after opening the IRA Savings Account. While the APY is often lower compared to an IRA CD, there are no fixed timeframe terms with an IRA Savings Account. This means you can regularly contribute to the account, and you can withdraw your money at any time without incurring an early withdrawal penalty from Discover. You can also choose to open your IRA Savings Account as either a Roth or Traditional IRA. Keep in mind that there may be an IRS early withdrawal penalty depending on your plan type and the age at which you withdraw your funds. Consider consulting a tax advisor to discuss your specific situation.

Traditional IRAs

There are two major advantages to a Traditional IRA. First, it may be funded with pre-tax dollars to reduce your overall taxable income. In other words, you may pay fewer taxes today. Second, the funds in your Traditional IRA grow tax-free until you distribute them. You can begin distributing funds without penalty at age 59¹⁄₂. If you distribute funds before then, you may be subject to an IRS 10% tax penalty on the withdrawn amount.

Distributions are required to start by age 70¹⁄₂ if you were 70¹⁄₂ by 12/31/2019. Distributions are required to start by age 72 if you turned 72 from 1/1/2020 to 12/31/2022. If you turned 72 in 2023 or years following, distributions will not be required until you are age 73. Consider consulting a tax advisor to discuss your specific situation and current Required Minimum Distribution (RMD) concepts.

Roth IRAs

Unlike a Traditional IRA, a Roth IRA is funded with after-tax income. And under current IRS rules, your contributions grow tax-free forever. Many financial planners counsel their clients to open a Roth IRA if they expect clients to fall within the same tax rate after they retire or when they are ready to make distributions.

One advantage of a Roth IRA is that that you’re allowed to distribute earnings from your account tax-free if you are 59¹⁄₂ or older and have held the account for at least five years. If you distribute funds before you’re 59¹⁄₂, your earnings may be subject to income tax and an IRS 10% penalty. Another benefit long-term investors enjoy is that Roth IRAs do not have the Required Minimum Distribution (RMD) rule that Traditional IRAs do. You are not required to begin taking distributions once you reach the RMD age required with a Traditional IRA,  you can let your account grow tax-free. That’s why many people find Discover Roth IRAs so attractive.

Roth IRA conversions

Current tax law allows you to convert a Traditional IRA to a Roth IRA regardless of your income and tax-filing status. While you’ll have to pay income tax when you convert your tax-deductible, tax-deferred Traditional IRA to a Roth IRA, the assets in your new Roth IRA will then grow tax-free forever.

As you can see, Discover’s IRA CD and IRA Savings Account offer a wide range of potential advantages for retirement saving, regardless of your current time frame or tax priorities. Thanks to their competitive rates, flexibility, and tax-advantaged benefits, Discover IRA accounts may provide one of the most convenient paths to future financial security.

Discover

In addition to offering IRA accounts to help you grow your retirement savings, Discover also offers an Online Savings Account to help you with your short-term savings goals and a full range of CDs to help you save for the future. Open an account online in minutes or call our 24-hour U.S.-based Customer Service at 800-347-7000.

The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. Please consult your tax advisor with respect to information contained in this article and how it relates to you.

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