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It is never too early to start saving for retirement. While your 401(k) might lay the foundation, supporting it with other financial vehicles is essential if you wish to create some truly golden years. An Individual Retirement Account, more commonly known as an IRA, is one of the smartest additions you could make.
Whether you’ve never previously heard the term IRA or you simply wish to acquire more info before potentially setting one up, this quick guide will answer all of your key questions, such as;
- What is an IRA?
- What are the different IRA options?
- Who can open an IRA?
- What are the benefits of using an IRA for retirement?
- How do you open an IRA?
The road to smarter retirement savings starts here.
What is an IRA?
An Individual Retirement Account is a long-term savings vehicle that is primarily designed for self-employed people but can be used by workers in traditional employment too. Holders of an IRA can contribute to their account either before or after paying tax with the help of year-end tax tips. Generally speaking, any savings made into this account must be left untouched until you reach the age of 59 - unless withdrawals are made for education or first-home purchases.
There are limitations on annual contributions (currently $6,500 for most account holders under 50 and $7,500 for individuals over 50) but IRAs remain a very powerful addition to any retirement savings portfolio.
What are the different IRA options?
Multiple IRA account types are available, including; traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. The vast majority of account holders, though, will use either traditional IRAs or Roth IRAs.
While they ultimately serve the same purpose of boosting your retirement savings and have the same contribution limits, there are some differences to consider;
- Traditional IRAs are tax-deductible when you make the contributions but are subsequently taxed as a regular income when you eventually take payments during retirement. They are also subjected to required minimum distributions (RMDs) starting from age 72.
- Roth IRAs are not tax-deductible now and are posted as an after-tax contribution. However, you won’t be taxed on them when you retire. You are not subjected to required minimum distributions, although your heirs would need to meet RMD regulations.
Who can open an IRA?
IRAs are designed to help people, like self-employed workers, plan for their retirement by saving money in lieu of a 401(k) account. However, this type of financial vehicle is offered to anyone with an earned income, meaning it can be used to supplement the 401(k) or other employer-led savings accounts.
An estimated 18% of working-age individuals have an IRA. However, as an investment vehicle, anyone that does not want the risks associated with investments may look to other savings accounts. Although it should be noted that the fact that it is a long-term savings tool, the short-term ups and downs of trading are unlikely to have an impact on your returns.
What are the benefits of using an IRA for retirement?
While a traditional savings account may be great for financing future purchases or building a safety net in case you lose your job, IRAs are ideal vehicles for retirement. Firstly, the large financial penalties imposed on withdrawals before age 59 encourage you to keep your savings in the account for their intended purpose.
Other incentives for choosing this type of retirement savings account include;
- IRAs offer tax advantages, regardless of which type you select.
- They are insured by the Federal Deposit Insurance Corp. (FDIC) for $250k.
- You can choose to invest in stocks, bonds, mutual funds, index funds.
- There is the option to have a self-directed or supported investment strategy.
How do you open an IRA?
An IRA may be opened via a range of outlets including online brokers, personal brokers, and investment companies. However, the majority of people open one through financial institutes like their bank. Some of the most popular IRA providers include;
- Betterment
- Charles Schwab
- Fidelity Investments
- Robinhood
- Sofi
- Vanguard
With a little research and professional advice, finding the best IRA for your requirements should be a straightforward task.
Conclusion
Individual Retirement Accounts are a great asset to possess, not least because they offer great flexibility on when you will see the tax benefits. Moreover, they do not prevent you from using other retirement savings vehicles while there is always the opportunity to make an early withdrawal if absolutely necessary - although it will cost you.
To make the most of IRA savings, though, the best advice is to open the account at the earliest stage. The more time you have to build your contributions, the better your quality of life during retirement will be.