It is important to start saving for retirement as soon as possible. Even if you already have a 401(k) at work, an Individual Retirement Account (IRA) can help you save even more (IRA). Anyone who makes money that is taxed can get an IRA, which gives them the benefits of compound interest and tax savings. You can open an IRA at almost any bank, including your own, and the fees to do so are usually lower than those for other investment accounts.
Even though opening an IRA isn't too hard, it can be hard to figure out which type is best for you.
Traditional and Roth IRAs are the two kinds. With a traditional IRA, you pay taxes on your earnings when you start taking money out, and you usually have to pay a penalty if you take money out before you turn 59 1/2. If you have a Roth IRA and have had it for at least five years, you can take out your earnings tax-free after you turn 59 and a half. In other words, income from a traditional IRA is taxed later, while income from a Roth IRA is not taxed.
Another big difference is that you have to start taking money out of a traditional IRA at age 70 and a half and a half. With a Roth, there is no age when you have to take money out, but there are limits on how much you can earn. People with an adjusted gross income of $110,000 or more as a single filer or $160,000 or more as a married couple cannot open a Roth. On the other hand, you can make as much money as you want with a traditional IRA.
That tells you a little bit about how money you put into an IRA works, but what about the money you take out? Depending on your income level, you may be able to deduct some or all of your contributions to a traditional IRA. However, if you are eligible for your employer's retirement plan, you may not be able to deduct all of your contributions. On the other hand, contributions to a Roth IRA are never tax-deductible, but earnings are tax-free if they are part of a "qualified distribution."
Each year, the federal government sets new limits on how much you can put into an IRA. It's usually a good idea to give as much as you can. The good news is that contribution limits have gone up since 2002 and will continue to go up, so there has never been a better time to open an IRA.
