If you’re working, it’s likely your company offers an IRA or 401K as a benefit. Perhaps you believe contributing to a retirement account at your age is ridiculous. After all, you don’t expect to retire for four decades. However, considering how the average lifespan is increasing, you may want to give thought to planning for a long retirement.
Why Should I Invest in an IRA?
Both 401Ks and IRAs are retirement accounts, but your employer chooses the investments for a 401K. Unlike a 401K, an Individual Retirement Arrangement (IRA) is opened on your own, in many cases with the aid of your bank. You choose the investments.
5 types of IRAs are:
- Traditional IRA. Money is contributed before tax, and principal and earnings are taxed when distributed (withdrawn).
- Roth IRA. Money is contributed after tax, and the principal and earnings are distributed tax-free.
- Rollover IRA. Retirement savings are moved from your 401K or profit-sharing plan from work typically after you change employment.
- Educational IRA (Coverdell ESA). Parents/guardians make nondeductible contributions for a child under the age of 18.
- Simplified Employee Pension (SEP). Self-employed people can utilize this form of retirement saving.
Here are some facts about IRAs:
- If you’re under the age of 50, you can contribute $5,500 across all your IRA accounts in 2016.
- You can also contribute to an IRA for a spouse who isn’t working if you file a joint tax return. If you contribute to a spouse’s IRA, that total of $5,500 is for the both of you.
- You can contribute to a 401K and an IRA at the same time
- In many cases, there is an initial minimum deposit, depending on the type and length of investment you select. Contact your local bank if you have questions.
- You may be able to deduct contributions to a traditional IRA on your tax return. You cannot deduct contributions to a Roth IRA.
- If you withdraw money from your traditional IRA before age 59 1/2, you may be subject to a 10% IRS penalty for early distribution. Exceptions include first home purchase, qualified college expenses, and medical expenses.
- If you have a traditional IRA, you must begin taking minimum distributions by April 1st the year after you turn 70 1/2. You may take money out of your Roth IRA at any time.
- Roth accounts are especially popular with young workers. Investors ages 25 to 34 comprise 24 percent of Roth IRA contributions, compared to 7.5 percent of traditional account contributions.
How to invest in an IRA
If your employer offers IRA matching as a benefit, you simply have to open a bank account to start the process of matching deposits. Most banks offer Certificates of Deposit of various durations (9 months, 12 months, 18 months) for your investment. In all likelihood, this is the easiest and safest method to invest. Make sure you shop around, because banks differ on initial deposit and term requirements.
If you want to start your IRA on your own, you can still open an account at a local bank. In addition, you can invest in mutual funds, index funds, exchange-traded funds, stocks, or bonds yourself using a computerized online brokerage, through a sticks-and-bricks financial advisor or through a certified financial planner online. All of these services charge fees to manage your portfolio, so it’s important to monitor these expenses carefully.
If you don’t want to put a lot of effort and planning into choosing your investment and determining your asset allocation, try a robo-advisor and pay a management fee.
Benefits of investing in an IRA
- Tax benefits permit your savings to potentially grow more quickly than in a taxable account.
- Your 401K may not be sufficient to meet your retirement needs. An IRA can close the gap.
- Your employment, self-employment or lack of employment do not affect your ability to contribute.
- You can choose your investments, including nontraditional ones, such as real estate and precious metals.
- You do not pay taxes on withdrawals from a Roth IRA.
Want sound financial advice about IRAs and other methods of saving?
Contact Mercer Savings today. Our financial knowledge can help you secure a healthy financial future.