Last Updated on January 4, 2021
There is no shortage of ideas when it comes to your financial future and the best place for you to spend your hard-earned money. Thankfully, there are also a wide array of financial tools at your disposal that can ideally position you to invest for your retirement.
What Are IRAs
IRAs are tax-advantaged investment vehicles that are designed to explicitly encourage financial savings. There are multiple types of IRAs, and they all come with varying contribution limitations, tax penalties for early withdrawal, and tax incentives.
How Do They Work
Each IRA works slightly differently:
- Roth IRAs allow for contributions of up to $6,000 per year, but more if you are over 50. The withdrawal from the IRA is not taxed, but contributions occur after-tax, meaning you do pay taxes on the contributions. There are no penalties for an early withdrawal.
- Regular IRAs allow for tax deductions on the contribution, not the withdrawal, creating an immediate financial benefit. You must stop putting money into this IRA at age 70 1/2, and there are taxes and financial penalties that must be paid for early withdrawal.
- SEP IRAs are IRAs for people who are self-employed. They can also be set up as a retirement account for small businesses, and there are tax incentives for employers who make contributions.
How Do You Contribute to Them
Contributing to this type of IRA is not hard. There are different contribution limits for each type, so this is something that you must check with your brokerage or financial advisor. However, generally speaking, you can set up your IRA to automatically deduct a certain amount from your paycheck.
While this is the easiest way, you can also write checks or make contributions throughout the year. Just make sure that you fully understand how a contribution can impact your tax situation, as you may find yourself with a larger-than-expected tax refund for participating in a simple IRA.
How Do You Open One
If you want to know how to open an IRA, listen to the experts. After all, according to the financial pros at SoFi Invest, “Opening your first IRA can be a bit like waking up early or eating eight servings of vegetables per day. Even though it could be a smart thing to do, you’re intimidated because it seems really hard—but once you get started, it may not be so scary.”
First, choose an IRA that’s right for you, depending on your financial situation. You can make this decision on your own or in consultation with a financial advisor. Next, select where you want to open the IRA account. This can be done at a brokerage house, bank, or through a financial advisor.
From there, decide how much you want to invest every month. Last, make a decision about your risk tolerance. This decision largely depends on you and your financial situation, but generally speaking, the younger you are, the more risk you can tolerate.