Regardless of how far or how close you are to retirement, Individual Retirement Accounts (IRA’s) are a great option through which you can start investing and start building a healthy retirement fund. IRA’s are easy to start and you can open an IRA at your local bank or brokerage. The main benefit that you will have through an IRA versus a standard investment portfolio is that the IRA option gives you tax benefits. Specifically, it allows you to defer several taxes on your investments through your IRA till you actually cash them out after retirement. In special cases, there may be a complete tax exemption on your investment.
However, where there are advantages, there are also some limitations. Here we will look at a few key things you should know before you invest through an IRA. Without the right information, your investment may not grow at all, or worse, you could end up losing money in the form of penalties.
1. Use A Mix If You Are New
When saving money for retirement or investing money to earn returns you have several options. Rather than putting all your eggs in one basket, it’s better to spread the money out into different investment options. The most basic of which are IRAs and regular savings accounts. Both these forms of savings have their individual benefits, and with money spread out among both of them, you can enjoy the best of both worlds.
It also gives you some room to learn about the different options, and if you were to make a mistake in one savings option it won’t cost you all your capital. When you consider investing in IRAs you must learn about how they work and the technicalities that you are subject to as an IRA owner. Without proper knowledge of how an IRA works and grows your wealth, you won’t know how to invest to gain the full benefit of this system.
2. Eligibility, Requirements, and Contribution Limits
Under the IRA framework, there are a few different kinds of IRA protocols that you can opt for. There is the traditional IRA, Roth IRA, and self-directed IRA to name a few. There are some rules and regulations which are common to all the IRA types and others that are specific to a particular IRA. Once you go through individual IRA options you will better understand Self-Directed IRA Rules, Roth IRA rules, etc. and this will help you make an informed decision about which IRA to pursue to maximize returns on your investment.
Depending on your age, occupation, location, annual earnings and many other factors, different IRA’s will produce different results. There is no one-size-fits-all policy, so if you need to, go ahead and hire an expert to advise you on what will work best for you.
You can make changes down the road if you find that a particular IRA is not working out well for you, but rather than having to go through that headache, it’s much easier to spend a bit more time doing your homework and then taking the plunge.
IRAs can be a great option for couples who are married. Even if your spouse is not working, they can still apply for an IRA and you can get twice the benefits. These are known as spousal IRAs and they offer many unique benefits specially designed for non-working spouses.
4. IRAs Aren’t Binding
Many working individuals already have a 401K plan in place at their workplace, luckily IRAs aren’t binding and you do have the option to contribute to both of these saving schemes simultaneously. However, what does vary is the amount of money that you can contribute to an IRA while also maintaining a 401K. Though the specifics of the exact benefits you can get from an IRA while also having a 401K will depend on your marital status, whether both partners are working and how much they are making annually.
A 401K, with an IRA, along with a savings account will be a fantastic investment portfolio.
5. Transferring Money To An IRA
If you are about to change jobs or you are close to retirement and your current employer has a 401K in place for you, you can have the 401K transferred to your IRA. However, if the paycheck is issued in your name, you will have 20% deducted from your check for taxes.
Transferring money to and from your IRA account can be tricky and the best way is to have it transferred between the custodians themselves so you are never part of the transaction.
Several other fine technical details are specific to each kind of IRA and your particular situation. Rather than just going for the option which is working great for your neighbor, invest some time into learning about the IRA platform and how you can manage it to maximize returns on your hard-earned money.
If you hire a professional to consult with before you make the move, that’s an even better path to follow. It might cost you a little bit of money but you will save a lot of time that you would otherwise have to spend in learning everything on your own. Professional advice will take you directly to what you need to know and teach you what you need to learn to make an IRA a profitable investment.