When working in the corporate world, it’s easy to leave your retirement income planning in the trusting hands of your employer. But perhaps you are looking for an opportunity to take a bigger stake in investing in your future. Or perhaps you are a small business-owner that needs to start thinking about their future for the first time.
To get you started, let’s dive into some basic facts to know about IRAs.
What is an IRA?
In a recent post, we discussed how a 401(k) is a retirement account that private sector employees can get through their employer. An IRA, or individual retirement account, is similar in that it is a long-term savings for retirement, but rather than being employer-sponsored, individuals are able to handpick and manage their own IRAs.
Can I have an IRA and a 401(k)?
Yes, individuals might decide to open an IRA in addition to their employer-sponsored 401(k) in order to diversify their investments. An IRA can provide individuals with more flexibility and control over their retirement income planning.
IRAs are completely self-directed. You can choose which banks or investment firms you prefer. Depending on life changes, you are able to freely transfer IRA accounts between financial institutions. You get to choose how much to put in, the different kinds of funds you want to invest in, and when to start taking money out post-retirement. At Montgomery Financial Partners, we can provide guidance to clients on their IRAs and retirement plans.
Is there a limit to how much I can put in my IRA?
To put it plainly, you should be putting as much money as you can into your IRA. That is, as much money as the Internal Revenue Service allows for. For 2023, the IRS allows you to contribute as much as $6,000 if you are under the age of 50. If you are age 50 or older, you can contribute up to $7,500 for the year.
Are there different types of IRAs?
There are two main types of IRAs: traditional and Roth. With a traditional IRA, you contribute pre-tax dollars, meaning you will receive an upfront tax break on the amount of income you choose to deposit in your account. You will, however, owe taxes on these dollars when you make a withdrawal.
A Roth IRA is funded with post-tax dollars. There is no immediate tax benefit, but since you have already paid your income taxes, the money and all of its earnings will be tax-free when it comes time to make withdrawals. Plus, unlike traditional IRAs, there are no tax penalties if you decide to withdraw early from your Roth account.
While it is impossible to say if one IRA is better than the other, there are certainly advantages that may be better suited for some investors. An IRA is important to understand as one of your sources of income in retirement. As always, please contact us if you have any questions about your investments, retirement, financial plans, or social security claiming.
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