Your favorite uncle may not be named Sam when it’s time to retire. If you are in your 40s or younger, don’t expect to see full benefits from Social Security, even if you’ve been paying into the government system since your first job. If you want to enjoy retirement by living at least at the same comfort level you are living now, you need to start investing for your own retirement. For some people, an Individual Retirement Arrangement (IRA) is part of that plan.
What is an IRA?
An IRA is a retirement savings plan which offers a way to save for the future while enjoying tax benefits now. The IRS has specific rules regarding tax benefits, maximum contributions and deductions which are subject to change for each tax year. The IRA is a personal account which you need to open on your own and schedule your own deposits.
How Does an IRA Work?
You need to open an IRA account and fund it with some money you’ve saved up, or by rolling over a 401K account from your previous employer. Shop around for a discount brokerage and compare fees and minimum investment amounts carefully.
Once you have your IRA open and funded, it’s time to choose the types of investments you want in your IRA. Similar to balancing any investment portfolio, it’s wise to choose both individual stocks as well as bonds for your IRA. The idea is to grow your money over time, so look for growth stocks as well as those that pay dividends.
Tax Benefits of an IRA
There are more than 10 types of IRA accounts and the tax benefits of each vary.
With a traditional IRA you can enjoy tax-deductible contributions as well as some tax-deferred growth. Again, the IRS has limits on maximum contributions for the calendar year. If you also have a 401k, you may not receive the same type of contribution tax benefits as your neighbor who does not have a 401K but has just an IRA.
Who Can Have an IRA?
As long as you have a taxable income, you can have an IRA. The IRS does have some income limits and regulations regarding who can have an IRA, but most people who work are eligible to open an IRA. For example, if you are single and make less than $120,000 you can open an IRA, according to the IRS.
When to Open an IRA
If you receive unexpected money or are ready to start saving for retirement, it’s time to open an IRA. A good time to open an IRA is near the end of the year, particularly if your tax bracket has changed due to a second income or a raise. Opening an IRA is one way to adjust your tax situation, in your favor, providing you meet the IRS’ rules.
“Publication 590 (2009), Individual Retirement Arrangements (IRAs),” IRS,
“Status of the Social Security and Medicare Programs, “http://www.ssa.gov/OACT/TRSUM/index.html