3 Little-Known Perks of IRAs

Your IRA has some tricks up its sleeve.

Many Americans have an individual retirement account. But your IRA could hold some surprises when it comes to contributions and withdrawals. Learn how to make the most of your retirement savings account with these three perks.

1. Catch-up contributions

IRAs are a great place to invest for retirement outside of your 401(k). However, one major drawback is that you can only contribute so much in a given year. Those age 50 and older can take advantage of our first perk: catch-up contributions.

For most Americans, only $6,000 can be saved in an IRA in a given year. Compared to the 401(k) limit of $20,500, the IRA contribution limit may be underwhelming. It should come as no surprise that while 401(k)s held an estimated $7.3 trillion in 2021, IRAs held under $12 billion. When it comes to stashing cash for retirement, many Americans balk at the low savings potential of an IRA.

The good news? Those aged 50 and older are eligible to make catch-up contributions. As opposed to the $6,000 contribution limit for most Americans, in 2022 those aged 50 and older can contribute an additional $1,000. It's not life-changing or even retirement-changing money, but it's certainly a perk for older savers.

2. 72(t) distributions

When most people think about retirement savings, they think of locking up their money until they're in their 60s. And under many scenarios, they would be right. IRAs are meant to be retirement vehicles, and so incentivize owners to leave their money in the accounts for a long time. However, those needing liquidity now have a couple of options, including a provision known as Section 72(t).

Typically, the money we save in retirement accounts is left there until we are retirement age. In the case of an IRA, the IRS allows those 59 ½ or older to withdraw funds from their account freely, albeit subject to income tax. However, those under the age of 59 ½ are typically unable to withdraw from the account without incurring a 10% penalty.

Section 72(t) is an exception to the early-withdrawal penalty incurred by most pre-retirement withdrawals. The rule allows taxpayers to withdraw from the account by taking a series of substantially equal periodic payments. There are some limitations, however. First, you must take payments for the longer of five years or until you reach age 59 ½. Second, you must take payments equal to one of three amortization methods approved by the IRS. Draining your IRA through a 72(t) distribution should be viewed as a last resort, but can provide some much needed liquidity in an emergency.

3. Account rollovers

An estimated $1.35 trillion sits in forgotten 401(k) accounts, which is reason enough to take advantage of our next perk: IRA rollovers.

There are many reasons to roll your old 401(k) into an IRA, including to keep your thumb on your money. In an IRA, you can roll over funds from qualified retirement plans, other IRAs, 457 plans, and more. Additionally, rolling over your old accounts could reduce fees while allowing you to invest with the best brokers. Rolling over funds into an IRA has some nuance, so always consult with a professional before making an IRA rollover.

IRAs enable Americans to save for their retirement outside of their employer's plan. They also offer a variety of benefits including extra contributions, early withdrawals, and account rollovers. Taking advantage of these perks is a good way to get the most out of your IRA.