A work-based retirement plan like a 401(k) that comes with an employer match is a great way for workers to save for the future. However, not everyone has access to these accounts, and this makes individual retirement accounts a necessary option for many future retirees.
What Is An IRA?
An individual retirement account, frequently called an IRA, is a retirement savings vehicle that is available to most Americans. An IRA can hold any investment type an account holder deems worthy. The account holder controls the investment strategy, and the IRA itself is not an investment. Rather, it’s better to think of an IRA as an investment vehicle that holds the actual investments.
Types of IRAs
There are a couple of IRA options for those who own businesses, but most employees will focus on either a traditional IRA or a Roth IRA. The main difference between these two options is the tax treatment they receive. A traditional IRA is a tax-deferred account. The money that an investor puts into the account goes toward reducing taxable income in the current year.
The Roth IRA does not provide a tax benefit in the current year. All of the money contributed to a Roth is taxed on the front end. For both the traditional and the Roth IRA, tax-free growth is a benefit to all investments. The tax treatment is different when the money goes into the account, and it’s also different when it comes time to withdraw the money.
Qualifying distributions from a traditional IRA are taxed at the regular income tax rate. Withdrawals from a Roth IRA are tax-free as long as the account holder meets the IRS regulations. Both the traditional and Roth require investors to wait until age 59 1/2 to make withdrawals. Otherwise, investors incur a 10% penalty.
Another IRA option that many people utilize is a rollover IRA. This is an account that’s opened to hold funds from a 401(k) or another similar retirement account that fell under a previous employer’s retirement plan. Many people choose to roll their accounts over so that they can have greater control over the investment options while cutting useless fees.
Opening An IRA
The experts at SoFi say it can be beneficial to open an IRA online. Many online brokerages come with lower fees than full-service brokerages that operate primarily on a face-to-face basis. Those who are more comfortable making investments on their own could come out ahead over the long haul with an online IRA.
As of 2022, there is a $6,000 IRA contribution limit for most investors. This limit increases to $7,000 once a person hits age 50. For married people, both spouses can contribute up to the maximum. Maxing out an IRA earlier in life can pay off as the investments compound over time.
IRAs are one of the best options for retirement savings. They offer investors complete control over their investments, and there’s no better time to open an IRA than today.