While some employers offer their employees a 401K plan, not all do. You may work for a company whose benefit package isn’t quite as attractive as others on the market. This may leave you as the person who is in charge of your retirement.
Maybe you’re self employed or you want to supplement your retirement savings with an additional plan. With all of the negative news stories surrounding social security, most people now know that social security alone will not provide you with enough money to live out your years once you choose to retire. For this reason, you need to learn about an IRA.
An IRA, or individual retirement account, comes in two varieties: A Roth IRA and a Traditional IRA. For this article, we will look at the Traditional IRA.
If you have ever had a 401K plan through any employer, you already have a good idea of how a traditional IRA works. First, you deposit money into the IRA. You can then deduct that amount from your taxable income. This means that you will be paying less income tax for the year. Hopefully you will put that extra money that you saved in taxes in to your IRA so that it will continue to grow by gaining interest. If you spend the money, it defeats the pre-tax benefit of your IRA.
Anybody who works in some capacity and generates income (and claims it on their taxes) is eligible for an IRA. There may be limitations, though. If you are looking to start an IRA to supplement the retirement plan that your employer is offering you, there will be some limitations. These limitations are based on how much money you earn per year.
One of the potential downsides to a traditional IRA is that you are required to start taking the money when you reach the age of 70 ½. If you don’t take the minimum distribution amount, you will face some pretty sizable penalties from the IRS. Of course one of the reasons for this is that the federal government wants to start getting their tax money from you.
On the other side, you don’t want to start taking money out of you IRA until you reach the age of 59 ½. If you do, you face an early withdrawal penalty in addition to the normal income taxes that are required.
The only other drawback is that you can only deposit $4,000 per year. For most, though, that won’t be a disadvantage since you would be depositing a little less than $350 per month. If you’re able to do that, you probably have other investments as well as an IRA.
Remember that we said that there are two types of IRAs? With that in mind, is a traditional IRA right for you? It most likely is, especially if you’re young. This is due to the pre-tax deposits you can make.
If you haven’t given a lot of thought to your retirement plans, now is the time. It will be here faster than you think