When planning for your retirement, many people see that moment as something that will happen so far in the future that it doesn’t make much sense to plan so ahead. Some just stick with their Social Security, especially if they feel like they won’t bring in any benefit for today. However, the best option for any employed person, regardless of how far they are from retiring, is to add another safety net to their future with an IRA or individual retirement account. In our following guide, we share some insight on some things you need to know before opening an IRA, which can help you plan a better future for yourself and your family.
Why Worry about Opening an IRA?
Taking care of your retirement plans is a responsible strategy for your future. However, you will see great benefits from opening an individual retirement account today. Whether you’re under 50 or you’re near the retirement age already, any contributions you make to your traditional IRA will be tax-deductible for the fiscal year. Note that the maximum amount you will be able to deposit into your IRA each year will increase, allowing you to save more money for your retirement potentially. You can even combine it with your employer’s 401(k) depending on your financial situation, paving your way towards securing your financial stability in the long run.
Choose between a Traditional IRA or a Roth IRA
Once you’ve decided to open an individual retirement account, you will have to choose between a Roth or a traditional account, each with slight differences. Most people decide to go with a traditional IRA to place their pre-tax dollars away with no income limits. The money you put into the account will progressively increase tax-free until your retirement. By then, federal regulations demand all distributions be counted as regular income, and they get taxed at your nominal tax rate. However, if your employer already offers a 401(k), you may not fully benefit from the deductions of your IRA contributions.
In contrast, the Roth IRA won’t deduct your income taxes when you place your money into the account, even if it has the same deposit limit as the traditional IRA. However, once you start receiving distributions when you’re retired, that source of income will always be tax-free. What’s best for you will entirely depend on your circumstances.
Determine your Monthly Contribution
Regardless of what type of account you end up choosing, you need to determine how much of your income you will be placing into your IRA. When consulted, the experts at theentrustgroup.com point out the importance of contributing any amount, even if you’re unable to reach the maximum amount allowed each year, since you benefit from both the steady wealth increase in your savings account and the tax deduction. However, there are some restrictions on whether you can choose a Roth IRA if your income goes above the limits determined by the IRS, depending on your filing status. Therefore, you must consider your tax status, current income, and general financial situation to take any action within the law. Ultimately, you may want to enlist the help of a CPA to file taxes to make sure everything is correct, accurate, and in adherence to IRS regulations.
Always Compare and Shop Around for an IRA Provider
Once you’ve decided to open an individual retirement account, the next important question you should ask is which provider will deliver the best service for your needs. You can consult with banks, credit unions, and brokers to check their IRA offers, where they can offer various features and bonuses depending on your monthly contribution. Traditional investment brokerage firms offer investment advisors and have a closer relationship with you as a client. However, they charge high fees and commissions regardless of how the market is performing. On the other hand, self-directed investment accounts give you full control over your investment portfolio. Still, you will need to rely on your financial education to move the money following the market’s behavior. Even if you don’t like a provider’s performance once you open the account, IRAs are portable, meaning that you will be able to move it over to another financial institution without any penalties. You may even consider combining accounts in the future if that will benefit your financial situation.
Advocating for your retirement’s stability requires long-term planning that you can start acting upon today. At some point, you may start worrying about how to maintain your lifestyle with as few changes as possible when retiring. Opening an IRA may not be a big concern at the moment, especially if you’re prioritizing current debts and expenses. Still, just the tax-deductible benefit you get from allocating some money to it every month makes it worth investigating your options.