3 ways an IRA is a perfect supplement to Social Security

Individual retirement arrangements, more commonly known as IRAs, are powerful tax-advantaged retirement savings tools that most of us should be making the most of. Together with Social Security income, they can be vital supports in our later decades.

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.

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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shrink your taxes for the year of the contribution, but the money in the account -- and whatever it grows to -- can be withdrawn in retirement tax-free.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.

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1. It can fill your 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.

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2. It can help you retire earlier

Social Security is a vital support for most of us -- indeed, it provides about a third of the income for elderly people, and fully 21% of married elderly Social Security beneficiaries and 44% of unmarried ones get 90% or more of their income from it. But the earliest age at which you can start collecting it is 62 (and the latest is 70).

If you want to retire at, say, 60, you will have to do so without Social Security income, at least for a while. Enter your IRA -- you can start collecting from IRAs as early as age 59 1/2. (You can actually start earlier, but it's not recommended, as you'll face an early withdrawal penalty.) So having a plump IRA from which to draw income can help you retire earlier, if you're lucky enough (or you've been disciplined enough in your saving and investing) to be able to afford that.

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3. It can help you wait and get larger Social Security checks

Here's another way an IRA can help with your Social Security: It can be part of an income-maximizing strategy. Understand that you can make your Social Security checks bigger or smaller by starting to collect later or earlier than your "full retirement age" -- the age at which you can start receiving the full benefits to which you're entitled based on your work history. (That age is 66 or 67 for most of us.)

If you stand a decent chance of living a longer-than-average life, it will be worthwhile to delay starting to collect Social Security as long as you can -- ideally until age 70. Income from an IRA can help you get by until your Social Security checks start flowing. (Another reason to delay collecting Social Security, if you're married and are the higher earner, is to make your checks as large as possible for when you or your spouse are widowed -- and able to claim the larger of your two benefit checks.)

It's worth reading up on retirement strategies and how to save and invest effectively for your future. A few hours spent learning more might lead to your having many thousands of dollars more in your golden years.