When it comes to funding your retirement, there is one universal truth: you can never save enough. If you have a 401k in place at work and you contribute enough to max out your employer’s matching requirements, you are off to a good start. Have a good investment portfolio? Even better. But did you know there is another option you should consider adding as well? In this post, we are going to look at the advantages of an IRA.
Benefits of an IRA
Individual retirement accounts (IRA) are a great addition to any retirement fund and offer several benefits over other traditional investments, some of which we will discuss in the section below. If you do not currently invest in an IRA or are wondering what to do with a 401k after suddenly losing your job, consider these reasons to invest in an IRA.
Maxing Out Your 401k
If you are a wise investor and were able to max out your 401k contribution (the max allotment for 2015 is $18,000), you can opt to save even more by investing in an IRA. For the calendar year 2015, individuals under the age of 50 can save up to an additional $5,500 ($6,500 for those that are older).
Broader Investment Opportunities
Diversifying your retirement investments is critical to making sure you have the right balance for your retirement plan. You never want to put all of your eggs in one basket. With traditional 401k plans provided by employers, you only have a few options for investments – typically a few mutual funds to choose from. IRAs, on the other hand, often allow you to choose from practically any available securities. This gives you great control over your investments and provides the ability to diversify your assets and minimize risk.
Your Company Does Not Offer a 401k Plan
Not every company offers a 401k plan. This is especially true for smaller companies. If you find yourself in this position, it does not mean you are out of luck. Take advantage of a tax-advantaged IRA and feed your retirement!
The same goes for self-employed individuals and small business owners. Since “freelancers” are taxed at a higher rate, taking advantage of the tax benefits of an IRA are especially important, as it can help reduce your tax liability each year.
Difference Between Roth IRA and Traditional IRAs
There are several differences between a Roth IRA and a traditional IRA. For starters, while both offer significant benefits from a tax standpoint, the way they offer these advantages differs. Traditional IRAs give you a tax deduction in the year you contribute, however, you must pay income taxes when you withdraw funds. Meanwhile, ROTH IRAs do not offer a tax break when you contribute, but you do gain the benefit of not paying taxes on earnings and withdrawals during your retirement.
The other major difference between the two deals with rules for withdrawals. For Roth IRAs, you may withdraw contributions at any time without paying taxes or penalty fees. Once you hit the 59 1/2 year old mark, all of your withdrawals become tax-free as well. In addition, you never have to withdraw money at any time – you can simply hold the money in your account and pass it on to your beneficiaries.
The rules for a traditional IRA withdrawal are a little different. Beginning at age 59 1/2, your withdrawals will be tax and penalty free. By the time you turn 70 1/2, you must begin to make distributions. Finally, if you decide to pass your traditional IRA over to beneficiaries upon your death, they must pay taxes on the inherited IRA.