After working hard your whole life you may be looking forward to retirement when you will be able to sit back and enjoy the fruits of your labor. However, without an effective financial plan and retirement strategy, your golden years may come much later than expected. Also, your retirement years may see a quality of life that is lower than you would find acceptable.
On the other hand, there are many strategies you can adopt to make sure you are financially prepared for your golden years. One option you may want to consider is an Individual Retirement Account (IRA).
What is an IRA?
A tax-deferred investment account, an IRA can help you to accumulate wealth in preparation for your golden years. Various financial institutions offer IRAs which allow your contributions to be deducted from your income tax returns in some cases. Some types of IRAs allow you to withdraw funds tax-free.
How does an IRA work?
When investing into an IRA, the funds you contribute to the investment account is usually managed by a third-party, generally a financial institution of some type. The funds will be invested into stocks, bonds, and other types of securities. You can also self-direct your IRA investments which means you will personally make decisions on how your contributions are invested.
You will then allow your contributions to appreciate with the market and then withdraw upon retirement. However, if you withdraw your funds before reaching the legally-defined retirement age you may have to pay penalties.
Types of IRAs
There are numerous types of IRAs you can choose to integrate into your retirement strategy.
Traditional IRA
The most common type of IRA is the traditional IRA. This type of IRA allows you to deduct your contributions from your taxes for the year you contributed. The funds will be reported on your income tax return upon withdrawal which should only happen when reaching retirement age in order to avoid penalties.
Roth IRA
Probably the second most common type of IRA is the Roth IRA. With this type of IRA you will not be able deduct your contributions from your taxes. However, you can make withdrawals tax-free.
SEP IRA
This type of IRA is especially designed for self-employed people. Just like with a traditional IRA your contributions are tax deductible while your withdrawals are made with income tax liability.
SIMPLE IRA
Specifically designed for small businesses with less than 100 employees, the SIMPLE (Savings Incentive Match Plan for Employees) has a structure similar to a traditional IRA where contributions by employees are tax-deductible while withdrawals are taxed. Also, employers are required to make contributions to a SIMPLE IRA.
Should you have an IRA?
Contributing to an IRA is just one option for an effective investment and retirement strategy. Your specific retirement goals will determine which investment strategy works best for you. Call us and we can help you decide if an IRA is a good idea and what other components your retirement strategy should include.