When it comes to saving for the future, there are many options and sometimes confusing details to keep in mind. One of the most popular ways to save for retirement is with an IRA—an Individual Retirement Account. These accounts can help you put away money and grow it for later use. They’re popular because they come with tax breaks that help your money go further.
But knowing how an IRA works and where to get one can be confusing, especially for those whose employers don’t provide them with a retirement account. Find out more about these accounts and if they’re right for you below.
What Is an IRA?
Individual Retirement Accounts are savings accounts that you open on your own, unlike 401 (k)s, which your employer typically establishes. There are several different types of IRAs. Generally speaking, IRAs allow you to deposit money that accrues interest, dividends, and capital gains without being taxed every year. The government caps the amount you can place into an IRA in a year, with people under 50 allowed to contribute no more than $5,500 per year.
Do I Qualify for an IRA?
Almost anyone can open and contribute to an IRA. As long as you or your spouse receives taxable income and is under 70.5 years old, you can get an IRA. However, your contributions are only tax-deductible if you meet certain qualifications, such as not having a retirement plan through an employer.
What About a Roth IRA?
Roth IRAs are the most common type of IRA. You pay into a Roth with after-tax dollars, which means you’ve already paid income taxes on it. That’s unlike money that goes into a 401 (k), which is pre-taxed. With a Roth, you’ve already paid taxes. So, you do not have to pay when you withdraw the money during retirement.
When Can I Get the Money?
With an IRA, you can withdraw the money any time you want. However, if you are younger than 59.5 years, you will have to pay a 10% penalty on the amount you withdraw. The government does this to discourage people from taking money out before they’re retired, as these accounts are meant to serve as retirement funds. There are exceptions to that penalty, depending on how you intend to spend the money. If it’s a traditional IRA, you’ll still owe income tax on the money even if you’re over the age limit.
How Do I Open an IRA?
Any large financial institution can help you open an IRA. That includes banks, credit unions, and mutual fund companies. The main difference between them is how fees are charged for opening and maintaining the account. It’s unlikely that you’ll be able to avoid these fees altogether, but you can compare different options to find the one that works best for you.
What Happens to My Money In an IRA?
Generally speaking, money that goes into an IRA is invested, but exactly where and how is up to you and your financial advisor. There are some rules about what you can do with the money. However, typically you’re allowed to invest in nearly anything, including mutual funds, stocks and bonds, annuities, and some real estate. It’s wise to diversify your investments and work with a trusted financial advisor to ensure that you’re making suitable choices for your future.
Investing for retirement can be complex and daunting. Still, it’s essential to make a financial plan for your future to have security in your later years. It’s worth the effort today to learn about your options and invest your money wisely for the future.