What is an IRA? – Investing in Your Financial Future
One of the best things you can do for your financial future is start investing, not just saving, for your retirement. And the best time to start is right now. Seriously, right now.
If you aren’t familiar with IRAs yet, that’s okay. This article will walk you through the basics and getting started. You’ll be one step closer to Financial Liberty in less than 15 minutes.
What is an IRA?
An IRA is an Independent Retirement Account, and anyone can open one. More specifically, this is a special type of account for saving for retirement on your own terms. Contrary to an employer-sponsored plan, like a 401(k) or a pension, you contribute your own money and decide how to invest the money within your IRA.
The best part about an IRA is the tax advantages! There are two types of IRAs that dictate how these tax advantages work:
- Traditional IRA – You put money in the account before you pay taxes. That is to say, a portion of your income is no longer taxed.
- Roth IRA – You put money in the account after you pay taxes. Your income will be taxed the same, but any investment gains in your Roth IRA are not taxed.
My next blog will get into more details on Traditional vs. Roth IRAs, and how to select the best one for you and your situation. For now, we’ll discuss some of the other characteristics of an IRA:
- The IRS (Internal Revenue Service) limits IRA contributions to $6,000 per year ($7,000 if you’re age 50 or older). This limit applies regardless of income.
- You must contribute “earned income” to an IRA.
- Because you get tax advantages that are supposed to help you save for retirement, you should not withdraw from your IRA until you are at least 59.5 years old.
- You technically can, but you will have to make up the taxes you didn’t have to pay earlier and pay an additional 10% penalty.
Step 1.) Setting up an IRA
This is the easy part. Like, really easy. It can all be done online, and it only takes maybe 10 minutes.
Since the characteristics of an IRA are established by the IRS, it doesn’t really matter where you open one. They all have the same contribution limits and tax advantages. There may be slight differences in the user interface or customer service, but for the most part you will be able to invest the same amount of money in the same (or at least similar) securities.
Check with your current bank, and see if they also offer an IRA account. If not, you can try Schwab, E-Trade, SoFi, Wells Fargo, just about anywhere.
Step 2.) Contributing to an IRA
Once your account is set up, you will want to begin transferring money into your IRA. As briefly mentioned above, the IRS limits IRA contributions to $6,000 per year per person. That is to say, if you have two IRAs you can only contribute up to $6,000 combined between the two of them, such as $4,000 to one and $2,000 to the other.
$6,000 per year would be $500 per month, but even if you can’t max it out, it’s a great idea to get started now with whatever you can contribute, even $10 per month. It doesn’t have to be on a monthly basis either. Any time you get some extra money (birthdays, yard sales, extra tips, etc.) you can contribute money in a one-time contribution.
The money that you transfer into your IRA will remain as cash until you invest it. You can invest in individual stocks, mutual funds, index funds, ETFs, just about anything. A simple yet effective option is setting up the proper asset allocation, which I’ll cover in a future post. So be sure to follow me for the latest updates!
But for now, go open an IRA!
*Not a paid advertisement, just wanted to make it easier for you 🙂
Have more questions about IRAs? Let me know in the comments!