Do I Need An IRA?
I’ve had many people ask do I need an IRA? So many individuals don’t know what an IRA really is and why they need one. They think that having a 401(k) or similar account from their employer is enough to prepare for retirement. It’s not enough! In a study Fidelity Investments revealed, 49% of the people based their retirement on a date not on whether they had enough money to retire comfortably. Is that you? You know the age or date you would like to retire? Not quite clear on how much you need or plan to just make it work? An IRA is another necessary tool to help you get prepared for retirement. Take the time now to utilize all the options available to grow your nest egg (the money you will live off in retirement) until you’re ready to retire.
What is an IRA?
IRA stands for individual retirement account. You’re opening an investment account as an individual and not through an employer. It is a special investing account to assist with preparing for retirement. Why does it help? You get nice tax breaks on these investment retirement accounts. Also, you generally can’t access the money you contribute to retirement accounts until a minimum age of 59.5 years old.
There are two types of IRAs. There are several differences between the two types. However, the big distinction is:
1) Traditional: the contributions are tax-deferred, meaning you can contribute money to the account prior to taxes coming out of your income. When you withdraw money then the withdrawals are taxed.
2) Roth: contributions are taxed; however, you can withdraw money tax-free.
When can I open one?
You can open an IRA until December 31st of the current year and make contributions to lower your taxes until April 15th of the following year. In order to open an IRA, you have to have earned income. You have to be working and earning money. This income can be a salary from an employer or income from your small business. If you’re not working, you can open a Roth IRA based on your spouse’s earned income.
Do I meet income limits?
Generally individuals younger than 70.5 years old can make contributions to a traditional IRA. However, a Roth IRA has income limits. A single individual must have an income less than $131,000, a married couple must have a joint income less than $193,000.
How much can I contribute?
If you’re 49 years old and younger you can contribute up to $5,500 per year. If you’re 50 years old or older you can contribute $6,500 to an IRA account per year. See why this account must be used in conjunction with other investments and retirement accounts? You can only contribute so much a year, due to the tax benefits with investment retirement accounts. The government wants to make sure they get their money so while this is a great addition to your portfolio don’t try to bank on just an IRA either.
Where can I open an IRA?
You can open an IRA at most major financial institutions and full-service financial advisors, e.g. banks, mutual funds, full-service brokerage forms and discount brokerage firms. Most will have a range of investment options to pick from, which will allow you to create a diversified portfolio. Talk to your financial advisor or consultant to help you pick at which institution you will open your IRA account.
As long as you meet the earned income requirements you can open an IRA account so no need to wait. Start getting those tax benefits while investing in your future. Take action now that increases your financial security now and in the future. The earlier you start the better. The more money you will earn on your contributions. Yay, compounding interest.
Photo credit: Jodi Womack
