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REDDITThe benefits of an Individual Retirement Account (IRA) cannot be overstated. If you’re unfamiliar with the concept, sit back and relax for a quick and informative overview.
Individual Retirement Accounts exist because governments know that not everybody has access to a retirement account through an employer. Employer-sponsored programs like the 401(k) are tax-sheltered, and often offer incredible advantages like employer-matched contributions. If you have a 401(k) and fail to max it out, you’re leaving money on the table. If you have a 401(k) and don’t also have an IRA, you’re still missing out.
Most people use IRAs for stocks, bonds, and index funds. If you want to break free of these strictures and be able to use your IRA for for real estate, commodities, and loads of other neat stuff, a self-directed IRA is for you.
There are two main kinds of IRAs: Traditional and Roth. Traditional IRAs allow you to put money from any source into the account, even money that you haven’t paid taxes on yet, like a gift from your grandma. When you take the money out at retirement, you pay taxes on the lump sum then.
Roth IRAs are a little different. You are only allowed to deposit money that you earned and paid taxes on to the Roth IRA. When you withdraw the money years down the line, you won’t have to pay any taxes on it. The reason people might choose Roth over Traditional is because they assume that future tax rates might be higher than they are now. But nobody really knows.
For interested parties, the IRA conversion strategy incorporates both accounts (you can have both) and cuts down on taxes even further.
IRAs have annual contribution limits, because the government can’t let you just save unlimited money tax free. 2017 IRA limits are $5,500 for individuals, and $6,500 individuals 50 and older (so they can “catch up”). If you want to have both a Roth and Traditional IRA, you can only deposit a total of $5,500 (or $6,500 for over-50s) between the two.
You aren’t allowed to take out money from your IRA pre-retirement without financial penalty. The exception is your original contributions. Say you contribute $18,500 over four years to your Roth IRA. Over that time, it grows to $22,654. You could withdraw $18,500 without penalty, but any more and you’ll have to pay fines.
You can also withdraw IRA funds for certain emergencies, like health problems and personal disasters. This is easy enough to work out with the company that holds your IRA and with the IRS.
Those are the basics of the IRA. It’s an incredible way to invest without the high taxes associated with capital gains and the like. It’s made for people who don’t have a lot of money, but who wish to retire comfortably. Max out your IRA every year, and you’ll probably be doing just fine once it comes time to retire.
