Individual Retirement Accounts: Why Bother?
by William K.
September 22, 1996
Thesis: When planning for retirement, Individual Retirement Accounts offer several benefits; however, careful planning is essential to ensure that: upon retirement there is an adequate amount of money saved, that the heirs to the IRA are chosen carefully, and that unnecessary taxes and penalties are avoided.
I. Upon retirement there is an adequate amount of money saved. A. How much money necessary to retire?
1. Social Security verses retirement.
2. Savings Accounts verses retirement.
3. Advantages of starting an IRA early.
II. Careful selection of the heirs to the Individual Retirement Account. A. Advantage of leaving IRA to spouse
1. Special rights as a spouse.
2. Different options the spouse has for claiming money. III. Avoiding unnecessary taxes and penalties.
1. Recoverable trust as beneficiary.
2. Taking money out before the age of 59 1/2.
3. Penalties for leaving money in too long.
Many people often live their lives without considering how they plan to retire. People do not realize that the idea of living solely on the benefits of social security is not realistic. In order to secure a comfortable future, people must have some type of additional income. Sacrificing a small amount of money into an IRA at a relatively early age could make a considerable difference in the lives of people upon retirement. When planning for retirement, Individual Retirement Accounts offer several benefits; however, careful planning is essential to ensure that: upon retirement there is an adequate amount of money saved, that the heirs to the IRA are chosen carefully, and that unnecessary taxes and penalties are avoided.
It is important to consider how much money will be needed for a comfortable retirement. Careful planning is essential when considering an item with such importance. Phaneuf states that, according to figures used by most financial planners, upon retirement the average person will need roughly seventy percent of their current income to continue living their present lifestyles (94). With only income from Social Security and money saved in bank accounts, most people are unable to achieve this goal. Furthermore, one must also consider, for a retirement account to be effective the account has to maintain interest rates above that of inflation. Inflation increases approximately four percent annually; and standard bank accounts barely beat this rate. In fact, at present, most savings accounts have an interest rate below four percent. Thus, regular savings accounts are not a practical method to save for retirement; however, IRA's offer deferred taxes on the interest earned until the money is withdrawn from the account. Therefore for a given amount of money, there is a considerable advantage when saving in an IRA. For example, according to Heady: if you were to save $2000 dollars a year at 6% for 30 years under the terms of a regular savings account, the total earnings would be approximately $120,900 after paying taxes; however, if you were to shelter $2000 a year at 6% in an Individual Retirement Account that amount would increase by $48,000 dollars to a total of $168,000 because of the tax-deferred feature (60).
Using this example, the tax deferred feature of an IRA is easily recognized as having a considerable edge over regular savings plans.
Another advantage to consider when planning an IRA is to start the account as early in life as possible. It is obviously an advantage to use the program that is going to give the best overall return; however, the advantage of starting early should not be taken lightly either. As with all savings plans, a key factor in the final results is the overall...
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