An IRA is an investment tool that you can use to start saving for retirement. You may have heard this from us before, but time is one of your biggest assets while you are young. You can reap great rewards by starting your retirement plan at a younger age.
Let's take a closer look at what goes into an IRA, how to open one and some potential tax implications.
Not all IRAs are the same, so it's important to understand what type of account you are opening and the benefits of each.
Traditional IRA - You make contributions to your IRA today and your earnings grow tax-deferred until retirement (no upfront taxes). Once you retire and begin making withdrawals you are taxed at your retirement tax bracket which is usually lower than your pre-retirement tax bracket. This means you pay less in taxes!
Roth IRA - With a Roth account you pay taxes today on the money you invest in your account. The earnings can grow tax-deferred and then you enjoy tax-free withdrawals in retirement.
Rollover - Simply a traditional IRA that is used to "roll over" money from other retirement plans. These other plans might include an employer sponsored 401(k).
Once you have selected the style of IRA that you want to open you can put almost any investment into the account. Stocks, bonds, mutual funds and ETFs can all be placed in any of the IRA types.
Opening an IRA
Opening an IRA is a fairly easy process that won't take up too much of your time. First, select where you would like to open your account. You can talk to your bank to see what they offer or open an account online. The people behind Atlas Investing personally use Vanguard, but you are free to open an account where you like. You will next need to go through the process of opening an account. You may be required to provide personal information, such as your SSN, to open an account. Once your account is open you have the option to setup automatic withdrawals from a bank account. This isn't mandatory, but it will help ensure you are making frequent contributions.
IRAs, both traditional and Roth, are great instruments when saving for retirement. However, you need to know your contribution limits so that you don't suffer a tax penalty for over-contributing. If you are contributing to a Roth IRA, your contribution will be limited by your income. For 2017, if you earn more than $118,000 your contribution limit is reduced and eventually reaches zero if you make more than $133,000 as a single individual.
Contributions for 2017 are as follows for those not impacted by limitations from excess income:
Withdrawing From Your Account
For a majority of people, withdraws will begin to take place after reaching age 59 1/2, the legal retirement age stipulated by the IRS. IRAs do allow some flexibility with this rule as noted below:
You can withdraw up to $10,000 without penalty for first-time home purchase
If you become disabled
To fund qualified educational expenses
Some people have the misconception that you can take out a loan from your IRA. While this is allowed with a 401(k) retirement account, the IRA does not have this functionality.
IRAs can provide many benefits for those looking to start saving for retirement. We've said it before and we will say it again, time is your asset so don't waste it. Start saving as early as possible.