Younger people probably won’t be seeing as much from their Social Security as today’s retirees are seeing. As such, you should be doing everything you can to put aside money for retirement. One of the major benefits anyone can utilize is an Individual Retirement Account or IRA. Use these tax advantaged accounts to make the most of your savings. If you’re not already saving, what are you waiting for? Here’s a few tips to make the most of your IRA plan(s).
First thing’s first, you need to put aside money for your retirement. This concept is “pay yourself first”. If you let bills and normal expenses eat up your paycheck, you won’t have anything left to save for yourself. If possible, consider using auto-payment where a percentage of your paycheck goes straight to your IRA. This way, you won’t have to think about it every week. If you receive a bonus or pay raise, be sure your IRA sees some of that too.
Next, don’t use a savings account to save for long-term goals like retirement. Interest rates are low, so you’re money isn’t earning as much as it could in a retirement account. It is good to have an emergency fund for unexpected expenses like medical issues or car problems. Your money compounds in an IRA. You’ll see earnings on your initial investments. Those earnings will also start to earn for you as well…and so on and so on.
Why is an IRA better than a 401k? For one, you control the plan, not your employer. You choose who holds your account and what investments you want for the plan. For those who want more control, you can open a self-directed IRA where you are the custodian of the plan. This allows you to invest in things many financial institutions don’t allow (like real estate, precious metals and small businesses). Further, if you leave a job, you have to figure out what to do with the old 401k. If your employer offers a solid plan plus a company match, it’s a good idea to invest in both types of plans.
Finally, there are two types of IRA options. The traditional plan (which is funded with pre-tax money) and the Roth plan (which is funded with after-tax money). The major benefit of the traditional plan is that up-front tax break. You don’t pay taxes until you take distributions during retirement. Roth IRAs don’t offer the immediate tax break. However, all distributions (including earnings) are tax free when withdrawn. Choosing which options is primarily based on your personal tax situation. If you are in a higher tax bracket now than you will be when you retire, lean towards the traditional plan and vice versa for the Roth. Again, to be better diversified, you should contribute to both types of plans.
Whatever method of retirement saving you choose, you should get started as soon as possible and contribute as much as you can afford to each month. If you have any questions or need help opening up an IRA or to find out the major benefits of the self-directed plan, contact the IRA experts at the IRA Financial Group today at 800.472.0646.