Thinking about the long-term future is not the highest priority on everyone’s list of things to do, but planning for your retirement is an important process that you should take some time to consider. The younger you are, the more money you can eventually save up if you start planning now, setting yourself up for success in the future.
If you are a little older and still don’t have a retirement plan, it’s not too late to start one. One of the best things you can do — and, fortunately, one of the easiest — is to set yourself up with an Individual Retirement Account, or IRA. There are two varieties of IRA you can choose from and, even if your employer will not contribute with you, they provide security for the future. If this sounds like something you’re interested in, here are a few tips.
What is an IRA?
An IRA is a retirement account that you can open for yourself, or you can go through your employer if they offer a plan. IRAs are a great way to save up for retirement by setting aside a little amount of money each paycheck for a long period of time, from when you open the account until you retire, or need the funds for something before you retire.
There are two types of IRAs: Traditional and Roth IRAs. Both offer great tax benefits and a secure place to stow away money for the future.
Traditional IRAs do not require you to pay taxes on your investment until you withdraw them in the future, hopefully when you retire. You can also claim tax deductions on your investments each year. The downside of a traditional IRA is that you will pay a lot of taxes when you finally withdraw your funds. Roth IRAs, on the other hand, allow you to pay taxes as you set the investments aside, so you will not be required to do so when you withdraw the funds in the future.
Opening an IRA
Opening an IRA, either Traditional or Roth, is easy. You can visit sites like this if you are thinking about opening a free IRA account. You will be asked a series of questions so that they can determine what you will need to do in order to reach your retirement goals.
Obviously, if you plan on using your IRA to pay most of your bills when you retire, you may need to set aside a little more each month than if you are planning to use the funds as supplemental income in the future. And, again, if you are older and do not yet have an IRA, you may need to place more money per month in the account to make up for the years you have missed.
They will help determine which type of IRA is right for you and what you can do to make your retirement successful.
How Do You Contribute to an IRA?
Once you and your financial planner figure out what you need to set aside each month, you can make the payments into your account automatically with each paycheck, so you don’t even have to think about it.
You can choose to set aside a percentage of your paycheck each pay period, or you can determine a round figure, say $200 per paycheck to go into your account. You can also change these numbers yearly so you can adjust your contributions with any pay raises or, alternatively, lost wages.
You are allowed to contribute up to $5,500 dollars per year, but that number can vary by year depending on any new regulations. If you’re over 60, you can contribute a little more per year.
Withdrawing Your Funds
IRAs are intended to be untouched until you reach retirement age, which is 60 years old as of now. Once you reach that age, you can continue to contribute if you are still working, or begin withdrawing funds with the appropriate tax penalties determined by the type of IRA you’ve chosen.
If you are under the age of 59 and a half, you can withdraw funds with a 10% tax penalty. Also, if all of the conditions of your IRA are met, you or your family can receive the full funds in extreme cases, such as death, severe disability and for medical expenses.
IRAs are a great way to save for the future, so look into opening one up today.
Madeleine Mason is a personal finance consultant who shares some finance tips with an online audience through her article writing.
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