An individual retirement account is an advantageous way to build a nest for the future, and it doesn’t take a lot of money to get started. Retirement Tip of the Week: Add some money from your savings or current cash flow to an IRA, and if you already have one, try to maximize it or review your investment options.
IRAs are retirement-focused investment vehicles and, like the 401 (k), they come with their own sets of rules. There are two types of individual retirement accounts: traditional, which are funded with pre-tax dollars that grow tax-free until distribution, at which point you are taxed, and Roth accounts, which use after-tax contributions but they are withdrawn from taxes. free (when used correctly). Getting started with an IRA is relatively simple. To contribute to this type of account, the person must be earning compensation for the year, which includes wages, salaries, bonuses, professional fees, commissions and self-employment income, according to the Internal Revenue Service. Rental, interest and dividend income, as well as pension or annuity income, do not count as compensation. With individual retirement accounts, savers can see their money grow exponentially more than if that money was stuck in a typical savings account. Investment accounts, such as IRAs and 401 (k) plans, offer investors compound interest, so that as more money is contributed and earned in the account, more money is generated. Take this example: If a 25-year-old person invests $ 1,000 each year for 10 years, then $ 2,000 each year for 10 years, and then stops contributing to the account, at age 65, they would have $ 160,000 (assuming a rate of 6 % return), according to personal finance site Her Money. If a 45-year-old investor did the same but started contributing at 45, they would have less than $ 50,000 at 65. Do you have any questions about your retirement, including where to live? Please see the MarketWatch column “Help me retire” and email us at HelpMeRetire@marketwatch.com What you need to know first Contributions are limited to $ 6,000 in 2021 and 2020, with an additional limit of $ 1,000 for people over 50 years. Savers have until the deferred tax deadline, May 17, to contribute to an IRA on behalf of 2020. Contributing during a prior year can provide tax benefits when filing last year’s tax return and also save room for more. contributions to the current year IRA. . Contributions to traditional IRAs may be tax deductible if the investor does not participate in a workplace retirement plan, or if they participate in a workplace retirement plan but meet certain income thresholds: 2021, single taxpayers or heads of household can take a full deduction up to their contributions if they have a modified adjusted gross income of $ 66,000 or less, and a partial deduction of up to $ 76,000; married filing joint returns or qualifying widowers can take a full deduction if they earn $ 105,000 or less, and a partial deduction of up to $ 125,000; and married individuals filing separately must earn less than $ 10,000 to receive a partial deduction. See: Is Suze Orman Right? Is A Traditional IRA Really The Wrong Way To Invest For Retirement? A Roth IRA does not allow tax deductions, but they make sense for people who are currently in a low tax bracket and anticipate being in a higher tax bracket at the time of distribution. Investors may also have an easier time tapping into these funds before age 59-1 / 2 to obtain qualified exceptions (more details on distribution rules and who is eligible, according to the IRS, here). Roth IRAs are subject to income thresholds for contributions. Single taxpayers or heads of household must have a modified adjusted gross income of less than $ 125,000 to contribute the maximum amount to an IRA, and can contribute a reduced amount if they earn up to $ 140,000; married filers or qualifying widowers must earn less than $ 198,000 for the full limit, or up to $ 208,000 for a reduced amount. Married individuals filing separately have a contribution limit of $ 10,000 for a reduced amount. Spouses can also contribute on behalf of their non-working husbands and wives to a spousal IRA. See also: How to Buy 10 Years of Retirement for $ 3,650 Getting Started Many banks and financial institutions host IRAs. It’s usually as easy as looking for an IRA on the institution’s website. If you are already a member of that bank or company, you will likely see your information on the screen to confirm its accuracy and the account can be opened in minutes. Then it comes to financing the account, which can be done through a simple transfer between accounts at the institution or with money from outside the company. Connecting an external bank account to the IRA can take a few days, or even a week, but people can also deposit money with a check if they don’t want to wait to fund the account. Once funds have been added to the account, retirement savers must decide how they would like to invest the money. For the newbie, this can seem overwhelming. One option is a target date fund, which is an investment tied to an estimated retirement year that automatically adjusts to be more conservative as that year approaches. Kiplinger selected a list of 10 target date funds to consider. Others who want a more personal approach may want to consider contacting an institution financial advisor who can help design the appropriate asset allocation. Choosing specific investments requires more time and research; Consider these tips for making investment decisions if you are a new investor. Want more tips for your retirement savings journey? Read the “Tips for Retirement” column on MarketWatch