Even if retirement is decades away, saving money for when that time arrives is never too early. The landscape has changed immensely for retirees who may have grown up watching their parents collecting from pension plans provided by previous employers. Social Security can be a source of income in retirement, but most likely won't be enough by itself to cover you.
Saving and investing while working is what will make a significant impact on the financial aspect of your life in retirement. An IRA can help fill the gap and allow you to retire comfortably.
What is a Traditional IRA?
Traditional IRAs are Individual retirement accounts aren't part of an employer program and stay with you even if your marital status, where you work, or where you live changes.
You will want to check with your financial institution if there are purchase requirements for particular investments and if there is a mandatory annual contribution.
In most cases, your contributions to an IRA are tax-deductible with withdrawals classified as income, which means they are taxed. Penalty-free withdrawals can be made when you've reached 59 and a half years old and after that. Otherwise, you will pay a 10 percent penalty for withdrawing early. By the time you are 70 and a half, you're required to withdraw a minimum amount on an annual basis.
What is a Roth IRA?
Roth IRAs are very similar to a traditional IRA, with some distinct differences. The biggest difference is that with Roth IRAs, you're taxed upfront when you contribute to the fund, and not taxed on the back end.
Income limits are also set on Roth IRAs. Individuals and married couples can't contribute to a Roth IRA if they make more than a certain amount of money per year.
Unlike traditional IRAs, you're able to take withdrawals before reaching 59 and a half years of age without paying tax penalties since you've already paid taxes on it. But you'll pay a 10 percent penalty on the earnings for withdrawing before 59 and a half years of age. This penalty is waived if the money is used for first-time home purchases, medical bills, or college. Also, with a Roth IRA, there is no mandatory distribution requirement for you to take withdrawals at 70 and a half.
Why Invest in an IRA
There are several reasons why investing in an IRA could make sense for you. Here are a few reasons to choose an IRA:
- There's no match from your employer on a 401(k) –They're not attached to an employer, so you have the freedom to invest on your terms.
- You can control where and how your money is invested – With a 401(k), someone else is managing the account for you. If you want control over the amount and types of investments, IRAs are the way to go.
- You change jobs frequently – Having to roll over your 401(k) can be a hassle. An IRA doesn't need to be moved when you change jobs, and you can keep it in one location.
- You've maxed out your contribution limit on your 401(k).
How to Open an IRA Account
There are many institutions out there that allow you to open an IRA account. Do your research to find out what’s required to open an account. For instance, some may require you to have a minimum of the investment amount to open an account. Some are as low as $1,000, though it is more common that there's a $3,000 minimum investment requirement.
Start making contributions to your retirement plan today. NASB's experts can also help answer your questions about IRAs by calling 800-677-6272.