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IRA Basics

Individual Retirement Accounts (IRAs) are designed to help people prepare for retirement. In some ways, IRAs are like 401(k) accounts, but there are important differences.

While we recommend that you speak with a financial advisor to make smart choices about your retirement, we answer some of the most common questions people have about IRAs below. 

 

What is an IRA?

An IRA is a retirement savings account that individuals can open independently of any retirement or pension plans that may be offered through an employer.

These accounts offer tax benefits and may reduce the amount of taxes you pay as you’re saving for retirement or the amount of tax you pay when you withdraw from your account, depending on which IRA you use. Your financial advisor can answer specific questions about your tax situation.

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How is an IRA different than a 401(k)?

A 401(k) must be sponsored by your employer, while an IRA is opened by individuals independently of any employer-sponsored plan accounts.

Other important differences include contribution amounts, rules about distributions and potential tax implications. For more detailed information, speak with your financial advisor.

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Should I roll over my 401(k) to an IRA?

If you’re like most people, you’ll change jobs about a dozen times during your career.1 Although you may be able to keep your 401(k) account when you change jobs, many people prefer to “roll over” their 401(k) into an IRA and keep their retirement savings together in one place, where it can be easier to manage. Talk to your financial advisor to find out more.

There is no tax penalty to roll over your 401(k) from a former employer directly to a personal IRA. Your financial advisor can help open an IRA with Franklin Templeton.

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What's the difference between the two main types of IRAs, Traditional and Roth?

The basic difference between a Traditional IRA and a Roth IRA is how each one affects your income taxes.

The money you contribute to a Traditional IRA may be subtracted from your taxable income, so it may reduce the amount of taxes you pay in the year you contribute to the account, depending on eligibility. However, distributions from a Traditional IRA are generally taxable—even in retirement.

There are no tax deductions available for contributions to a Roth IRA. However, when you withdraw money, distributions from a Roth IRA are not taxable, provided that you are 59½ or older and you have held the account for five years or an exception applies.

Does it make more sense for you to save money in a Traditional IRA, a Roth IRA, or both? Every situation is different, and your financial advisor can help you make that decision.

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How much money can I save in my IRA account?

The IRS limits how much money you can save in an IRA account. In 2013 and 2014, the maximum amount is $5,500 for both Traditional and Roth IRAs combined. People age 50 or older may be able to contribute an additional $1,000. For more information, see Contribution Limits.

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Can I withdraw money from an IRA?

In general, withdrawing money from your Traditional IRA prior to 59½ has tax consequences and may result in penalties assessed by the IRS. However, there can be additional restrictions and also certain situations in which you can withdraw money from an IRA without penalty. If you have questions, your financial advisor or tax advisor can help.

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How do I name beneficiaries, and why is it important to do so?

An IRA can be one of the largest assets of an estate. Naming beneficiaries for your IRAs is important because it allows you to determine what happens to any funds that remain in your IRA when your estate is passed to your heirs. If you do not name beneficiaries, what happens to your IRA may not be what you intend. Speak with your financial advisor, or call us to get help with adding beneficiaries to your Franklin Templeton IRA.

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What about SEP or SIMPLE IRAs?

SEP IRAs and SIMPLE IRAs are retirement accounts that small business owners can open for employees. For more information, see Employers & Plan Sponsors.

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Do you have more questions?  Speak with your financial advisor or call us at (800) 527-2020.

 

 

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