When you reach retirement age and stop working, it doesn’t mean you’ll no longer have to find the money for your daily and monthly expenses such as food, housing, healthcare, transport, and utility bills. This is one of the reasons why you should have a sufficient amount of savings that’ll cover all your expenses once you retire.
Fortunately, there are plenty of ways that can help you attain your savings goals and prepare for the future. This includes one or more individual retirement accounts or IRAs.
If you’re new to this concept, keep reading to learn more about what is an IRA is and how it works.
What Is An IRA?
Primarily, an IRA refers to an investment account that individuals can set up to save money for their retirement expenses. It’s one of the most powerful resources for retirement savings because it provides you with special tax advantages such as tax-free growth or savings on a tax-deferred basis.
To learn more about this concept, the following are the different types of individual retirement accounts you should keep in mind:
- Traditional IRA – Under this retirement account, you can make contributions using your pre-tax income. This means you don’t need to pay taxes on any amount of money you set aside for this account. Also, any earnings collected under this account can grow potentially tax-deferred until such time that you withdraw them during your retirement years. This financial setup can be very beneficial in case you think about retiring abroad.
- Roth IRA – Similar to the traditional IRA, a Roth IRA allows you to make contributions using the money you’ve already paid taxes on. Your earnings under this retirement account may potentially increase free of taxes and the withdrawals you can make are also tax-free, provided that certain conditions are met. These can include being 59-and-a-half years old at the time of the withdrawal and owning the account for at least five years.
- Rollover IRA – This account lets you receive funds from other retirement plans. This means transferring eligible assets from an employer-sponsored retirement account such as 401(k) into an IRA.
As you can see, there are different types of individual retirement accounts to consider for your retirement. But, if you want to get the most out of your savings, be sure to select an IRA that suits your financial needs.
IRA: How Does It Work?
Now that you’re familiar with what an IRA is, the next step is to learn about how this type of retirement account works for you. In order to better understand individual retirement accounts, the following are key characteristics to note:
- There are many different types of IRA investments available. You can invest in bonds, stocks, and other assets such as precious metals. For example, if you want to trade in gold, you can get an individual retirement account to make this happen. In doing so, you may need the assistance of a reliable IRA dealer like The Patriot Gold Group to help you handle your account. However, the way your account will grow over time depends on the amount of contribution you make and how you intend to invest it.
- If you’ve decided to open an IRA, you can have it done through a bank, Robo-advisor, or a trustworthy broker. Typically, opening an account with a broker or Robo-advisor allows you to invest in assets like bonds and stocks while having an account with the banks means getting certificates of deposits and savings accounts.
- Many individual retirement accounts require annual contribution minimums and limits. But, in order to contribute to this account, you or your spouse should earn a sufficient amount of income, depending on the type of IRA you plan of opening. Always check the minimum annual contribution before committing to an IRA,
- In addition to the contribution limits, an IRA has withdrawal rules. For instance, you may incur a 10% penalty and a potential tax bill if you decide to withdraw your money before you reach the age of 59-and-a-half unless you’re eligible for an exception. This can be due to a first-time home purchase, medical expenses, education expenses, health insurance, and any other extenuating circumstances.
With everything that’s going on around the world, including economic uncertainties, it’s important to pay attention to your retirement planning efforts to save money. When you have good savings, you’ll still be able to support your financial commitments even when you’re no longer working.
Therefore, if you want to ensure your retirement years are well-financed, keep the information above in mind. You’ll be confident in getting the most out of IRA and enjoying a happy retirement.