7 Secret Perks of Individual Retirement Accounts

Man with hush money
Photo by Sasun Bughdaryan / Shutterstock.com

There are all sorts of places you can save money for retirement if you don’t have a 401(k) or other workplace retirement plan: savings accounts, brokerage accounts, money under your mattress. However, few can compare with an individual retirement account.

IRAs share some key features — such as tax advantages and the ability to invest your savings — with certain other types of accounts. But IRAs also offer several lesser-known perks — some of which you won’t find in any other type of account.

Roth versus traditional IRAs

There are two main types of IRAs — Roth and traditional — and some perks of IRAs are unique to one type of IRA or the other.

Roth IRAs let you put after-tax money aside. As a result, you can withdraw both the contributions and their earnings tax-free in retirement, provided you follow IRS rules for withdrawals.

Traditional IRA contributions are tax-deductible in the year for which you make them, but both contributions and earnings are taxable in the year for which they’re withdrawn.

Little-known benefits of IRAs

Now, let’s take a closer look at some benefits of IRAs that you might not know exist.

1. There is no age limit on contributions

In the past, Roth IRAs were unique in that there was no age limit on contributions.

In other words, with a Roth IRA, you could make contributions at any age, provided that you or your spouse was earning income and you were otherwise eligible to contribute. But with a traditional IRA, you could not contribute to the account in the year in which you reached age 70½ or thereafter.

However, the federal Secure Act of 2019 repealed the maximum age for contributing to traditional IRAs. So, as of 2020, there is no age limit on contributions to Roth or traditional IRAs.

2. There are no required minimum distributions (Roth IRAs only)

Generally, you must begin taking required minimum distributions (RMDs) from most types of retirement accounts — including traditional IRAs — eventually. Previously, you had to take RMDs after you turned age 70½. But the Secure Act made things better for savers, starting this year. According to the IRS:

“The Secure Act made major changes to the RMD rules. If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.”

However, if you have a Roth IRA account, you don’t have to worry about this rule at all: There are no required withdrawals from a Roth IRA until after the original IRA owner dies.

Even better, withdrawals from a Roth IRA aren’t considered part of your combined income, an amount that determines whether your Social Security benefits are taxable and, if so, to what extent. That’s one more reason to love Roth accounts, says Greg Hammer, president of Hammer Financial Group in Schererville, Indiana.

“The Roth IRA, in my opinion, is one of the most flexible, advantageous savings vehicles to use,” he tells Money Talks News.

3. You could earn tax credits for contributions

Deposit money in a traditional IRA and you could get a tax deduction plus a tax credit, thanks to a little-known tax break called the Saver’s Credit. Even contributions to Roth IRAs, which aren’t tax-deductible, could allow you to claim the Saver’s Credit.

Adults who aren’t full-time students, aren’t claimed as dependents and make contributions to certain types of retirement accounts — including Roth and traditional IRAs — may be eligible for the credit.

Depending on your income, the credit is equal to 10% to 50% of your total contribution. So, if you contribute $6,000 to an IRA this year and qualify for the Saver’s Credit, it could slash your 2020 tax bill by anywhere from $600 to $3,000.

For the 2020 tax year, you may qualify for the credit if your adjusted gross income is:

  • $65,000 or less — for married couples filing a joint federal tax return
  • $48,750 or less — for people whose tax-filing status is head of household
  • $32,500 or less — for people with any other tax-filing status

4. You have until Tax Day to contribute

You generally have until Dec. 31 of each tax year to contribute to a workplace retirement account. But the IRS gives you until Tax Day to make your annual contribution to an IRA, whether Roth or traditional.

That’s true even if you file your taxes before you make the contribution, as we detail in “75% of Americans Don’t Realize This Tax Strategy Is Legal.”

For example, to make a contribution to an IRA for the 2020 tax year, you have until April 15, 2021 — even if you file your tax return as early as January 2021.

You can acknowledge a pending contribution on your 2020 return and then make the contribution after filing your taxes. Or, if you come into some money after filing and want to put it in an IRA, you could do so and file an amended tax return.

5. Spouses can contribute even if one doesn’t work

Stay-at-home spouses make many sacrifices to raise the kids and keep the house in order, but they don’t have to give up saving for retirement.

Married couples who file a joint tax return can contribute to an IRA for each spouse even if only one person works, assuming they are otherwise eligible to contribute to an IRA.

That instantly doubles the amount a family can save for retirement through IRAs — whether Roth or traditional.

For example, for tax year 2020, if only one person in an eligible couple works, the couple can contribute a total of $12,000 rather than $6,000 to IRAs.

People who are 50 or older can also contribute an extra $1,000 as a so-called catch-up contribution. So, a couple in their 50s, for example, could contribute a total of $14,000 to an IRA this year, even if only one person works.

6. You can use the money to buy a house

The government frowns upon people raiding their retirement accounts for reasons other than retirement. So, Uncle Sam generally assesses a 10% penalty on withdrawals made before age 59½.

However, you may be able to avoid that penalty in certain circumstances — which may include buying your first home. Qualified first-time homebuyers generally can withdraw up to $10,000 from an IRA to help pay for the expense.

“It does increase the odds of being audited, so you absolutely want to keep documentation,” Hammer says.

Another option is to withdraw the principal — meaning your contributions — from a Roth IRA. Since contributions to a Roth account have already been taxed, they generally can be withdrawn at any time without penalty.

Of course, just because you can withdraw money from an IRA early and avoid the penalty, it doesn’t mean you should. The longer you let contributions or earnings sit untouched, the more earnings they can generate for you — which means the bigger your nest egg will be by the time you retire.

7. You can use the money for college

Another circumstance in which you may be able to withdraw money from an IRA early and avoid the penalty is to pay for higher-education expenses.

You generally also have the option to withdraw contributions from a Roth IRA at any time to pay for college costs. That’s one reason Hammer says he advises his clients to consider whether it makes more sense to fund a Roth IRA in lieu of a 529 college savings plan.

“Roth IRAs allow the flexibility that if your child is not going to college, you’ve just added money to your retirement plan,” he says.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
The 10 Best Outdoor Home Upgrades for Your Money
The 10 Best Outdoor Home Upgrades for Your Money

There’s still time this summer to make improvements to the exterior of your home. These offer the best payback.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

10 Common Expenses That Have Skyrocketed for Seniors
10 Common Expenses That Have Skyrocketed for Seniors

Retirees must stretch their dollars further and further these days — no thanks to these costs.

3 Costly Social Security Mistakes That Women Make
3 Costly Social Security Mistakes That Women Make

Women face unique challenges when planning for retirement and making these mistakes can result in a skimpier retirement.

3 Good Things About Recessions
3 Good Things About Recessions

We don’t wish difficulty on anyone, but there can be an upside to a down cycle.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

The 16 Cars Most Likely to Last 200,000 Miles
The 16 Cars Most Likely to Last 200,000 Miles

One automaker takes half the spots on a list of the longest-lasting vehicles.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

9 Shopping Mistakes to Avoid at Costco
9 Shopping Mistakes to Avoid at Costco

Are you missing out on serious savings at your favorite warehouse club?

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

11 Products Now in Short Supply Due to the Pandemic
11 Products Now in Short Supply Due to the Pandemic

Many goods we take for granted have become tough to find in 2021.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

This Is the Most Dependable Car Brand in the U.S.
This Is the Most Dependable Car Brand in the U.S.

This brand’s vehicles are least likely to give drivers repair headaches, according to J.D. Power.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.