It’s Never too Early to Save for Your Retirement
Your retirement may seem a long ways off, but starting to save for it today can help ensure you’ll have a comfortable lifestyle and have the money to do the things you’ll want to do.
A popular retirement savings tool for individuals is an Individual Retirement Account (IRA). IRAs provide tax advantages by reducing your taxable income as you save. They are opened through a bank or an investment broker, and anyone over 18 who is earning income from an employer may open one.
The IRS currently allows you to deposit up to $5000.00 a year into an IRA if you are under 50.
You have Choices
There are two types of IRAs: Traditional and Roth.
- With a Traditional IRA, contributions you make to it are usually tax deductible and are made with pre-tax dollars. You won’t pay taxes on your gains (profits) until you start taking distributions, or withdrawals, at age 59-and-a-half. The advantage of this is that you’ll keep more money in your IRA account over a long period of time, which allows your money to compound at a faster rate.
- With a Roth IRA, the contributions you make to it are made with after-tax dollars. You pay taxes now, at your current income tax rate, because taxes on the money you're contributing were already taken out before you received your paycheck. This allows your earnings to grow tax fee, and if you anticipate being in a higher tax bracket in the future, the Roth IRA is probably your best choice.
Both the Traditional IRA and the Roth IRAs have eligibility requirements. With a Traditional IRA, you can only deduct your contributions at tax time if your family earnings fall below certain maximums and if you're covered under an employee-sponsored plan like a 401(k). According to Vanguard Group®, one of the world's largest investment management companies, if your Traditional IRA isn't deductible, then a Roth IRA is the better choice. With a Roth IRA, your contributions are not deductible and there are income limits. If you're single and make more than $125,000 in 2012, you are not eligible to open a Roth IRA.
What will this cost me?
To open an IRA, you'll need a bank or investment broker. Some discount brokers offer no-fee IRAs. Other brokers will charge a yearly management fee even if they don’t manage the IRA for you. No-fee IRAs are preferable. If you're charged a 1% management fee, that could equate to a 30% lower balance in your IRA over a 30 year period. Make sure you understand any fees involved with maintaining your IRA, and keep them to a minimum.
Whether you choose a Traditional or a Roth IRA to help you save for retirement, the point is to get started now. If you have money that’s sitting in a savings account and earning little interest, you might be able to make that money work harder for you by putting it into an IRA.
It’s not hard mastering basic financial planning and investment concepts and incorporating them into your daily life. Some people, however, feel more comfortable having a professional help them through this process. If this is you, you may want to seek out a professional Financial Advisor who, for a fee, will help you build a financial plan, explain investment options to you, provide objective advice and help guide you through decision processes.
Regardless of whether you decide to do your own financial planning or you hire a Financial Advisor to help you, you should first educate yourself on the basics of financial and investment concepts. There is plenty of information online to help get you started.
Written by Elizabeth Luna: Contributing writer on Finance
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