After having maxed out your employer’s 401(k) plan, and saved 6 month’s of living expenses, and paid off debt, most people will suggest that you start either a Traditional, or Roth Individual Retirement Account (IRA) plan. They are widely considered to be one of the soundest investments you can make, and people have been using them to their benefit for over 40 years. If you feel like you’re on sound financial footing, and have accomplished the goals we previously stated, you are more than likely headed in the right direction if you want to open an IRA. So, let’s jump in and get started on the basics!
A great place to begin is breaking down the main big differences between a Traditional IRA plan, and a Roth IRA plan.
|Your contribution is tax deductible||Non-deductible contributions|
|Money taken out is tax-free||Withdrawals are taxable|
|Can contribute past age 70 ½||Cannot contribute after age 70 ½|
|Remaining balance tax-free as inheritance||Taxed as typical income when inherited|
|No income restriction||Income restriction|
|Distributions required at 70 ½||No required distributions|
Who can open one? The short answer is that almost anyone can contribute to an IRA. However, of course it’s not that simple. For a Traditional IRA, you’ve got to be under 70 ½ by the end of the calendar year, and be receiving a salary, wage or bonus/ commission.
What does it require? One of the big differences between a Traditional, and a Roth IRA are income restrictions. To qualify for a Roth IRA, a single-filing taxpayer cannot make over $114,000. Married couples that make over $194,000 do not qualify. If you fall into either of those two categories, you do still qualify for a Traditional IRA.
When should I open one? The truth is that it is never too early to open an IRA account. One of the most appealing aspects of them is the way that you money compounds in value. As such, it is very smart to open it as soon as you are financially stable enough to do so. This way, you will enjoy the maximum maturity on your initial investment. Ensure that you have six months of living expenses – often called an emergency fund – available to you. Afterwards, map out your finances. If you feel you are stable enough to contribute a few thousand dollars (remember there is a yearly cap on how much you can deposit), then go ahead and get started!
Why should I open one? The biggest advantage of an IRA is the tax structure; you’re only taxed once, as opposed to year after year. With a Roth IRA, you are taxed when you deposit the income. This of course means you don’t have to pay when you start making distributions on it. With a Traditional IRA, you pay taxes on the withdrawal end. Either way, you avoid paid taxes year after year on the money in the account, which is a major bonus. Additionally, compound interest is very appealing. This means that if you deposit $1,000 the first year at a 7% interest rate, you end the year with $1,070. That $1,070 then accrues another 7% interest rate the next year, taking your total to $1,144.90, and so on.
How should I get started? The best way to begin your journey of opening an Individual Retirement Account is to speak with an investment professional. There are a number of large, trusted investing companies, such as E Trade, Fidelity, and Vanguard. The most important thing, however, is to ensure that you can sit down and meet with a professional face to face. In having a personal meeting, you will feel significantly more comfortable with this decision. Make sure to have questions written down before the meeting, so that you leave feeling confident and informed.