Spotlight on the Advantages and Disadvantages of IRAs
In terms of reducing tax liabilities, individual retirement accounts (IRAs) represent an efficient retirement saving vehicle. They allow US taxpayers to set aside a nest egg to support them in their senior years. We explore the pros and cons of IRAs and examine how Malta Pension Plans offer better tax-saving advantages.
There are two main types of IRAs: traditional and Roth.
Both forms represent a tax-efficient retirement saving vehicle, but each has its own pros and cons.
IRAs have been around for decades. They were created in response to declining take-up of defined-benefit pension plans. IRAs became popular as employees started taking control of their retirement investments. They offered significant tax-saving advantages over ordinary savings accounts.
With both traditional and Roth IRAs, savers can invest their money in various financial assets, including bonds, stocks, and mutual funds. Self-directed IRAs provide savers with more autonomy over their funds, enabling them to invest in a variety of different platforms, such as real estate, commodities, gold and other precious metals, or even peer-to-peer lending.
While traditional and Roth IRAs both offer significant tax-saving advantages, there are strict limitations on how much investors can contribute and when they can start drawing an income from their investment.
As of 2020, the maximum annual contribution for both traditional and Roth IRAs is $6,000; for investors aged 50 or older, the limit is $7,000. People whose adjusted gross income exceeds certain levels ($139,000 for a single person and $206,000 for married couples filing jointly) cannot contribute to a Roth IRA.
Both traditional and Roth IRAs support tax-free asset growth.
When your money is invested in either type of IRA, no taxes are levied on capital gains or dividends.
Traditional IRA contributions are made from pre-tax dollars and therefore reduce your taxable income at the time you make the contribution. However, any withdrawals from the account in retirement will be taxed as income.
In contrast, Roth IRA contributions are made after taxes, so they will not reduce your tax rate. However, withdrawals in retirement are not taxed.
Withdrawing from an IRA early attracts penalties.
Since IRAs were created to help people save for retirement, withdrawing funds before attaining a certain age can attract penalties.
With a Roth IRA, savers can withdraw sums equal to their contributions at any time without incurring tax liabilities or penalties. However, they can only withdraw earnings on those contributions if they are over age 59 ½ and have held the account for five years or more.
With traditional IRAs, if individuals make withdrawals before they reach age 59 ½, they trigger a 10% early withdrawal fee and incur income tax liabilities.
Many high net worth US taxpayers are switching to Malta Pension Plans.
Serving as a supercharged, cross-border Roth IRA, Malta Pension Plans confer significant benefits over both traditional and Roth IRAs.
Firstly, account holders can contribute non-cash assets, such as real estate, business interests, foreign investments, or stocks and shares, directly to their Malta Pension Plan without liquidating them first. This allows them to avoid capital gains tax liabilities. In addition, Malta Pension Plans have no annual contribution limit. Finally, savers can start withdrawing tax-free distributions when they reach age 50.
A Malta Pension Plan is therefore a highly effective, tax-efficient form of investment that enables US taxpayers to stretch their funds further throughout their retirement years.
