The sooner you begin saving for retirement the greater the reward.
Individual Retirement Account (IRA) investment is an important way to save money for retirement. IRAs are savings accounts that can provide a tax benefit during the contribution years under United States tax laws. It is common for money invested in an IRA to be tied to the stock or bond market, making it susceptible to market fluctuations over time. However, a financial advisor or other investment strategy counselor can assist with age-appropriate investment strategies for IRA investment.
An IRA is funded by the account holder and is a great way to save for retirement. The American Association of Retired Persons (AARP) states that anyone with income is eligible for participation in an IRA. Individuals who are covered by an employer-sponsored savings plan, such as a 401k or 403b, may still participate in a traditional IRA but may not be eligible to take full advantage of the tax savings on contributions. There is a limit on the amount of money that can be contributed to an IRA; for the 2008 calendar year, the limit was $5,000 per person.
There are many different types of IRAs, including Traditional, Roth, SEP, SIMPLE and SARSEP plans. A summary of frequently asked questions explaining the differences between these plans is available at the IRS website. The main difference between a Roth IRA and the more traditional forms of IRA is that the Roth IRA is funded with after-tax dollars and grows tax-free. The distributions and the gains are also withdrawn tax-free.
Traditional IRAs are established by individual taxpayers, who can set aside pre-tax dollars for retirement. The money is withdrawn at retirement, but mandatory withdrawals are required beginning at age 70, even if the individual is still employed. The money withdrawn, or distribution, is taxed at the current tax rate, as are any gains that were accrued during the investment period.
A great benefit of funding a traditional IRA is the tax benefit delivered to the investor. Since the money is put in before being taxed, it offers a tax incentive for individuals to save during their working years, during which time they are likely in a higher tax bracket due to their income from being employed. An IRA can also offer a second tax advantage at retirement. By the time the money is withdrawn, the account holder is likely retired and therefore has a lower income and tax bracket, which can provide a reduced tax bill in retirement, since the distributions will be taxed at a lower rate.
For employees who decide to use IRAs, knowing when to start investing is very important. The earlier an investor begins an IRA investment plan, the larger the retirement nest egg will be. According to The Motley Fool, starting early is vital to saving successfully for retirement. For example, for each $10,000 investment that is allowed to grow for 40 years at 15 percent compounding interest, the investor will earn $268,000.
When choosing a company to house retirement dollars, there are several key factors to consider. Fees charged by the brokerage firm, including IRA fees, custodial fees or rollover fees can reduce the amount an investor can save for retirement. In addition, availability of online access, personal services and portfolio review can help an investor choose the most appropriate approach based on age, risk tolerance and desired retirement income.
There are many easy ways to open an IRA. Most banks and credit unions provide IRA services. In addition, many online brokerage houses, such as Fidelity, Merrill Lynch and Prudential, offer IRA savings plans for their customers. Different companies may offer different options for funding accounts, such as automatic deductions, online transfers and real-time trades. Although the minimum amount required to open an account varies, some companies accept beginning deposits as low as $200. Most plans offer automatic contributions, either directly deducted from a regular paycheck or through a direct debit from a checking account. This is a recommended way to save for retirement since it is automatically done and account holders do not have to remember to make their contributions.
Once the account is open, investors may choose from a variety of available funds, including individual stocks, bonds and cash reserve funds. Funds can typically be traded and reallocated based on the investor's requirements. Many banks and brokerage firms offer free investment advice on how to diversify, understand asset allocation and use retirement calculators to determine the ideal monthly amount to save.