IRA - Individual Retirement Account
EVERYONE should have an IRA (unless you do not qualify)
In 2024, annual contribution limit was $7,000/per year, $8,000 for those 50+ (Check Current Limits)
Regardless of whether you have a ROTH, Traditional, or both, your total contributions cannot exceed the limit
MAX OUT your IRA when you first start your career.
The more you have invested early allows that money to grow for a longer period of time. You can always reduce the amounts later, but it will impact your retirement
You can access monies from both IRA's after the age of 59.5
Withdrawing prior to 59.5 can be subject to a 10% penalty and additional income taxation
Selecting which IRA depends on whether you believe you will make more money now or in retirement (Either will be beneficial)
You can set up your own ROTH or Traditional IRA by
Opening an account with a number of financial institutions like Vanguard, Charles Schaub, Invesco
Working with a financial advisor; though they may take out 1-3% of assets under management (AUM) annually
Through company programs for retirement
ROTH IRA
Uses post tax dollars (from your bank account)
After 59.5 distributions are 100% TAX FREE since you already paid taxes prior to investing
ROTH IRA's can be beneficial if you believe you may be making more money in retirement (higher tax bracket)
You may take out your contributions (e.g. $583.33/month, $7,000 annually) at any time TAX FREE. Since you already paid taxes, they will not be subject to taxation. or penalties
However, taking out your contributions reduces your growth potential
Traditional IRA
Uses pretax dollars (directly from your paycheck)
After 59.5 distributions are taxed based on your tax bracket (See Tax Brackets)
Many people use this IRA thinking they will make less money in retirement and will fall in a lower tax bracket (lower taxes)
Traditional IRA's may be 100% tax deductible (reduce your taxable income)
There are no income limits (switch over to a Traditional IRA if you exceed ROTH IRA limits)
Benefits of using a Traditional IRA
Using Pre-Tax dollars reduces your gross income and taxes on the money put into your IRA; you will pay taxes on the amount when you withdraw
Pre-Tax dollars are considerably less (15-20%) than Post-Tax dollars and allows you to keep more money now for month to month expenses. This amount may be negligible, but with the combined reduction of annual taxes and the potential that your tax bracket will be lower in retirement than your current tax bracket, you may save money.
Maxed Out on IRA's?
You can set up your own personal investing accounts or invest your money with a broker
If investing on your own, you can find similar investments that mimic typical IRA investments
There is no minimum to what you can invest personally
In order for you to contribute to a ROTH you must meet the following criteria (2024). Click here to see the current limits.
If you exceed these limits, congratulations on making more money. At this point, find a financial advisor who can actively manage your investments with a proven track record or select a large fund that has a history:
Shows healthy returns consistently over the past year, 5 years, 10 years, all time. You do not want a fund that had a few good years over ten that made them positive.
Has been around a long time. I selected my company because they have been in business for over 100 years and made it through multiple recessions and are still around.
Are actively managed; not passively. If it is not managed, you may as well invest in generic funds or ETF's that show consistency (SPY's 10% ROI a year)
Find returns that can exceed 15-20%. In general, a company with a consistent rate of return in double digits would be ideal, but getting a fund that can beat the market (SPY's 10%) by 2-3x (20-30%) will secure your retirement.
Depending on your income level you may also get a tax deduction for contributing to your IRA.
The 2024 limits on deductions are listed below