Millennials are a significantly different generation as compared to the others. Research says that they work the hardest to make money, but they lag when it comes to savings. In fact, a majority of them do not have any savings for their retirement. It is an alarming situation as healthcare costs are rising, and life expectancy is increasing.
Having a retirement fund is crucial for sustaining your current lifestyle without having to depend on anyone for money. The easiest way to start saving for your retirement fund is by opting for an Individual Retirement Fund or an IRA. In simple terms, it is similar to a savings account which can provide you tax benefits. A lot of people don’t opt for an IRA simply because they fear the technicalities associated with it. We have broken down the details of the IRA and simplified it so that you can start one tomorrow.
What is the IRA?
A lot of salaried individuals who work with private sector companies invest in 401(k) accounts sponsored by their employers. However, a staggering 35% of private companies do not provide this facility to their employees. In this scenario, the IRA is a good starting point to start saving for your post-retirement life. The best part is that it provides the same tax benefits as those of 401(k) or 403 (b). It is advisable to invest in both if you can, to build a considerable retirement fund.
Who is eligible to open an IRA?
Any person who earns an income or has a spouse who earns an income can open an IA. However, there are different types of IRA with different eligibility criteria and investment limits. There are two types of IRA – traditional and Roth IRA.
Traditional IRA is the one that allows you to defer your taxes on post-retirement withdrawals. It means you won’t have to pay any taxes till you take your money out during your retirement. As you are not paying your taxes, your fund can grow by manifolds in the years that you have till you hang your boots.
To be eligible for traditional IRA, you or your spouse should be under 70.5 years of age and must be earning a taxable income. If your employer doesn’t offer a retirement plan, you can contribute to the acceptable limit. Also, you can deduct this amount from your taxes. However, if you already have the benefit of 401(k) at your workplace, your contribution becomes deductible only if your AGI is less than $61,000.
Roth IRA, on the other hand, is the one in which you put your after-tax money. You won’t have to pay any taxes when you withdraw money during your retirement. One major benefit is that it allows you more flexibility with regards to your withdrawals. It allows you to withdraw money without any penalty if you are above 59.5 years of age and have one of the verified reasons for withdrawal.
Which IRA is better for me?
In most cases, your income will define the right IRA for you. What should you do if are eligible for both, traditional and Roth IRA? In that case, you will need to ascertain the tax bracket that you expect to be when you retire. Traditional IRA will save you more money in the long run if you expect to be in the lower tax bracket. However, it is advisable to opt for the Roth IRA if you will be in a higher tax bracket after retirement.
How can I open an IRA?
To open an IRA, you need to have a bank account, or you can avail of the services of a financial broker. There is an option of opening it online if you don’t have the time to do it in person. Before you select a particular financial service provider, it is advisable to ask a few questions. Here is a list that may help you in this regard.
- What is the annual fee of the account?
- Do they provide advisory services? If yes, how much do they charge for it?
- What are the investment options available for the account?
- What is the trading cost, and does it change after a certain number of transactions?
Retirement can be a beautiful time if you have the money to spend your ripe years as you please. Opt for a retirement fund today to live your life to the fullest.