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These days, people are living longer than ever, which means retirements are lasting longer than ever. To make sure you have enough money, it’s important to start saving as soon as possible. And one way to do that is with an Individual Retirement Account, or IRA.
IRAs are not work retirement plans. You can open these accounts through a broker and don’t need to go through your employer. It’s typically easy to set up your account– and you can allow your broker to have as much – or as little – control over your investments as you choose.
There are two types of IRAs - a Traditional or a Roth. In most cases, traditional is better for taxes when you are still working, while Roth is better during retirement.
Which is better for you? Compare the features of a Traditional and a Roth IRA.
The IRS limits how much you can invest in an IRA each year. If you’re younger than 50, you can invest up to $5,500 into an IRA. If you’re 50 or older, you can invest up to $6,500 a year.
Even better, when you add money to a Traditional IRA, you’ll get a tax deduction for your contribution. Now you’re saving money for the future while also bringing down this year’s tax bill. The Roth IRA doesn’t offer a tax deduction for your contributions.
You can start making retirement withdrawals from your IRA as soon as you turn 59 ½, even if you’re not working. When you take a withdrawal from a Traditional IRA, you’ll owe income tax on the withdrawal. But with a Roth IRA, you already paid income tax on this money up front, so the withdrawal is tax-free. This means you’ll never have to pay income tax on your investment earnings.
IRAs are retirement plans and that’s what the IRS wants you to use them for – at least until you turn 59 1/2. If you want to take money out before then, it counts as an early withdrawal. The IRS charges an extra 10 percent penalty on early withdrawals which can destroy your investment return. While there are a few special situations when you can avoid the penalty, like paying for excess medical bills and college expenses, generally once you put money in an IRA, you should try to keep it there until retirement.
Are you saving enough? See how you compare with other households:
Source: LIMRA, Consumers’ Retirement Perspectives, Fourth Quarter 2012
1IRAs include traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs,and SIMPLE IRAs) 2Employer-sponsored retirement plans include DC and DB retirement plans.
Sources: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey and U.S. Census Bureau