We all know that retirement planning is essential, yet nearly two-thirds of Americans don’t have any kind of individual retirement account (IRA) to rely on once their working years are over. It’s an area in which we are lacking. If you’re one of them, now is a great time to learn about saving for retirement using IRAs, regardless of age.
A 2018 study by the Center for Financial Services Innovation found that only about 28% of Americans are living truly “financially healthy” lives, based on responses to questions about spending, saving, debt, and planning ahead. Financially healthy Americans are more than twice (59%) as likely to have an IRA as those who are merely financially coping (25%). Meanwhile, only 31% of the study participants had an IRA account.1
There are a variety of types of IRAs that are used to earmark funds for retirement savings and benefits in different situations. Traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRA, Spousal IRA, Self-directed IRA, Backdoor Roth IRA, Inherited IRA; and all offer tax benefits that reward you for saving. Undoubtedly, an IRA is a good investment vehicle, yet it is not technically an investment in and of itself. An IRA is a type of account that holds your investments into an account, just like a bank account, and the amount you earn in an IRA is based on the investments held within the account. The purpose of the account is to achieve better investment returns than you’d get by placing the money into a regular savings account.
Knowing how much you can contribute to and deduct from IRAs is key. Starting in 2019, both the primary varieties of the traditional IRA and Roth IRA allow you to save up t$6,000 (up from $5,500 in 2018), and $7,000 if you’re over 50 (up from $6,500 in 2018, with the “catch-up” contribution staying fixed at $1,000), even if you’re contributing to a 401(k) or other workplace savings plan. Other factors to consider when obtaining IRAS are roll-over requirements and requirements on distributions.
For some, an IRA may be the only retirement savings vehicle accessible to workers who employers do not provide defined contribution plans like 401(k). Utilizing IRAs as alternative supplement provides these investors the flexibility to further control where and how their contributions are invested. If you are currently in a lower tax bracket than you think you will be during retirement, Roth IRAs can be a great investment vehicle for savings during your peak earning years. Plus, there are a lot of good options for opening a ROTH IRA that offer $0 account minimums and low fees.
Typically, you can open an IRA account with a bank or other financial institution, life insurance companies, mutual funds and brokerage firms and is a simple process. Before purchasing any investments, make sure you read, understand all the disclosures you are given and do your homework to make sure the company you’re working with is legitimate, and the investment is appropriate for you in light of your individual financial circumstances. It’s okay to ask questions, to protect yourself and your investment.
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1 Langone Alix. A simple way to boost your retirement by as much as $80,000. Money.com. April 2019. p 25.