Here’s a look at what traditional and Roth IRAs are and three ways that they can be perfect supplements to your Social Security income.
Traditional and Roth IRAs
Traditional and Roth IRAs both offer tax-advantaged saving, but the tax breaks are different. The traditional IRA accepts contributions on a pre-tax basis: You get to shrink your taxable income by the amount of your contribution, which shrinks your tax bill for the year of the contribution. There is taxation, though: When you withdraw money from the account later, usually in retirement, it will be taxable income.
While the traditional IRA offers an upfront tax break, the Roth IRA offers a back-ended one. Contributions to it don’t shrink your taxes for the year of the contribution, but the money in the account and whatever it grows to can be withdrawn in retirement tax-free.
For 2020 and 2021, you can contribute up to $6,000 per year in all your IRAs combined, plus an additional $1,000 if you’re 50 or older.
Filling The Income Gap
The first way that an IRA can supplement your Social Security income is simply this: Social Security income alone will likely only provide a fraction of the retirement income you need or want. The average monthly retirement benefit was recently only $1,547 — roughly $18,500 per year. If you earned above-average wages, you’ll collect more, but still not a huge sum. So adding to it via IRA savings can be a critical move.
Note that contribution limits will increase over time, and you’ll pass the age-50 threshold at some point, too, so it’s very possible you can amass much more.