Are you prepared for retirement? If not, it might be time for you to learn what an IRA is.
Only 36% of Americans believe that they’re on track with retirement savings. If you want to make sure that you’re prepared to retire successfully, you need to make sure that you’re using every option at your disposal and are opening retirement accounts to save money. An IRA is one of the best accounts you can open to prepare for retirement.
So what is an IRA, and what are they used for? Here’s everything you need to know about IRAs and how to plan for retirement with one.
What Is an IRA?
An individual retirement account (IRA) is a type of investment account in which taxes will be deferred. An IRA is a popular type of account meant for retirement savings. With most IRAs, contributions will be tax-deductible, and you’ll only pay income tax on your withdrawal.
It’s straightforward to open an IRA, and you can do so at a bank or with a broker or robo-advisor. There are four main types of IRAs, including:
- Traditional
- Roth
- SEP
- SIMPLE IRAs
We go over each of these categories in more detail later in the article.
When you open an IRA, you can use the account to invest in several different assets, including CDs, stocks, bonds, and more. With IRAs, you can move your money in and out of various investments and change them.
An IRA is less limiting than a 401(k), and its flexibility is one of its greatest strengths. While you can manage and choose all of the investments yourself, you can also opt to use a robo-advisor to diversify your account and select the assets for you.
Why Should I Contribute to an IRA?
There are many reasons why someone may choose to invest in an IRA. One of the top advantages is that it offers more flexibility than other retirement savings options. A 401(k) or pension can be quite limiting and may not allow you to get as much as you need for retirement.
An IRA can serve as a good retirement option that will help you save on taxes while also letting you invest your money in various ways. For example, you can put CDs, stocks, bonds, and more into your retirement investment account.
On top of choosing between different types of investments, IRAs can be helpful because there are so many different types. While some of them will require taxes to be paid on withdrawal of your savings, others, such as a Roth IRA, will require the taxes to be paid before investing in the account instead. You can then withdraw the money tax-free when the time comes to do so.
Because of the flexibility of an IRA, it’s an excellent option for saving for retirement. However, many people don’t choose to use only an IRA but will have multiple types of retirement accounts instead.
Contributing to an IRA alongside contributing to a 401(k) can be helpful and will allow you to be all the more prepared for retirement. You may also want to invest in real estate with the help of Ballard Built advisors.
Types of IRAs
There are several popular types of IRAs. Some offer advantages like tax breaks, while others allow employee and employer contributions. Review each option carefully to decide what’s best for you.
Traditional IRA
A traditional IRA allows you to make tax-deductible contributions over a year. The contribution limit is $6,000 or $7,000 if you’re older than 50.
With a traditional IRA, you’ll need to pay income taxes on the amount you withdraw. You’ll be required to start making withdrawals once you’re 72.
Remember that you can’t take money out early before you’re 59 1/2. You’ll have to pay a 10% tax penalty if you do.
Roth IRA
A Roth IRA is an account in which you won’t get a tax break when making contributions. You’ll pay taxes on your income and then contribute to the account.
However, unlike with a traditional IRA, you won’t have to pay taxes when you make withdrawals from the account. You can withdraw contributions from your Roth IRA at any time you choose to and without any penalties or taxes to pay.
SEP IRA
A SEP IRA is a type of IRA for people who are self-employed or small business owners without many employees.
Like with a traditional IRA, the contributions you make will be tax-deductible. You’ll only pay when you withdraw from the account. There will be a withdrawal penalty if you withdraw before you’re 59 1/2, and you’ll need to start taking minimum distributions by the time you’re 70 1/2.
SIMPLE IRA
A Savings Incentive Match Plan For Employees Individual Retirement Account (SIMPLE) is an IRA that small businesses with less than 100 employees will have.
These accounts are similar to traditional IRAs since contributions are tax-deductible. Tax will be deferred until withdrawal. Then, it will be taxed as income.
Employees can make a maximum contribution of $14,000 per year or $17,000 if over 50. The employer will also contribute as well.
How to Choose a Retirement Plan
So what is an IRA, and how can it help you save for retirement? An IRA is a valuable type of investment account that offers a lot of flexibility compared to a 401(k) or other types of retirement plans. Be sure to consider opening one if you want to be prepared for retirement.
Do you need more financial tips? Read the other helpful guides in our blog today.
About the Author/s
The New Jersey Digest is a new jersey magazine that has chronicled daily life in the Garden State for over 10 years.
