Spring is tax season, and if you’re like most people, you have more than your federal and state tax return on your mind. How to accrue the proper savings for necessities such as medical care, college funds and summer vacation expenses are on many people’s minds when April rolls around. Investing in an Individual Retirement Account (IRA) can help lessen the worry for one of these important financial nest eggs – your retirement fund.
Each year, the IRS establishes the legal IRA limits that dictate how much one person can contribute to their IRA account. Changes are usually minimal or nonexistent – from 2015 to 2016, for example, the IRS did not change the IRA contribution limits for both traditional and Roth IRAs. Although there is a ceiling to how much you can put in your account, there is also potential to accrue a generous amount of savings for your golden years.
Roth vs. Traditional IRA: Which is Better for Your Future?
Both Roth and traditional IRAs are a great opportunity to ensure a secure future for yourself and your loved ones. There are key differences between these two types of IRAs, however. Each type benefits certain financial situations more than others.
Opening a traditional IRA is a prudent alternative to opening a 401(k). Typically, this IRA account allows you to:
Increase your annual tax refund, since contributions can be tax-deductible
Begin saving regardless of your present-day income
Start increasing your savings without paying an income tax on annual appreciation
A traditional IRA is thus most beneficial to the investor who is looking to steadily increase their retirement savings while receiving valuable tax benefits. Keep in mind that most traditional IRAs stop being tax-deductible once an investor starts withdrawing funds from an account.
The IRA limits for this type of IRA are currently set at $5,500 for anyone under 50 years old, and $6,500 for those 50 and older. Contributions can be made until the investor turns 70 ½ years old, at which point withdrawals from the account must begin. Many who are self-employed or who lack a workplace retirement saving plans have turned to traditional IRAs as a quick way to accumulate savings for a structured and financially stable life after retirement.
Comparatively, a Roth IRA is appealing for younger investors who are willing to bear tax burdens in exchange for a more financially-free future. With a Roth IRA you can:
Begin withdrawing funds without paying taxes every time you withdraw
Start saving and withdrawing at any age
Spend your retirement earnings freely without the worry of filing an income tax
Roth IRAs do have an income eligibility requirement, but it is generous and well within the financial range of most interested participants. Single investors who earn between $117,000 and $133,000 per year are subject to stricter IRA limits (standard Roth IRA limits are the same as traditional IRAs – $5,500 for those younger than 50 and $6,500 for 50 and older). Married investors earning between $184,000 and $194,000 per year are also subject to similar Roth IRA contribution limits as single investors.
The more stringent IRA limits for investors with an upper-bracket income lead some to consider a traditional IRA instead. For younger investors falling below the income cap, however, opening a Roth IRA is an excellent opportunity to invest in a very comfortable future that will not be burdened by heavy taxes.
Open Your IRA Account Early to Compound Your Rewards
Investors interested in developing a stable retirement fund should start planning early. It’s simple economics: the earlier you start, the greater chance of overcoming any financial setbacks and receiving a good reward when you decide it is time to reap the benefits of your hard work.
Consulting with a knowledgeable financial advisor shouldn’t be overlooked. A trusted expert can provide you with insight about which type of IRA is best for your financial situation, the state of your earnings and retirement funds five, 10 or 20 years down the road and how much IRA limits can fluctuate in the future.
Furthermore, it is prudent to take some time to consider the different lending institutions that offer IRA accounts. Your bank may come to mind first, and while it is often a reliable route to go, it is not your only option. Private institutions may offer different tax benefits, investment choices, sign-up rebates and lending fees than banks. If you’re looking to truly maximize the earning potential of your retirement account, search for an option that will involve little to no hidden fees or interest payments while giving you the chance to contribute a healthy sum to your account for a long time.
Funnel Your Hidden Assets Into an IRA Account
While money from income is typically the largest financial asset that is channeled into a retirement account, there are other valuables and liquidities that can be used constructively, as well. If you would like to contribute the maximum amount possible without surpassing IRA limits, but are lacking in income, consider putting the profit from any stocks, bonds, treasury notes, mutual accounts and valuable possessions to good use.
The tax return you receive from any of your side investments can easily be put toward your IRA account if you are willing to plan ahead. In addition, take the time to look around for possessions that might be accruing value without you knowing about it. For example, gold and silver are valuable commodities found in jewelry, old coins and antiques that many do not bother to invest, even though they are not subject to inflation and hence can be worth a lot.
Speak with an expert or lending institution geared toward the specific asset that you would like to invest towards your retirement. Why keep your jewelry locked in a box, when you can talk to a gold rollover professional who can help you maximize their value?
Investing an amount that comes close to the IRA limits, or even the lesser Roth IRA income limits, can prove to be one of the most important decisions you make about your future. The generous earnings your account can accumulate just might give you the peace-of-mind you desire 20 years into the future.