Why Should I Invest in an IRA?

Why Should I Invest in an IRA

The Internal Revenue Service (IRS) created the Individual Retirement Account (IRA) to give taxpayers another way to save for retirement. Contributing to an IRA allows you to take advantage of market gains and possible tax benefits.

You do not need to work for an employer to have an IRA. If you are self-employed, or if the company you work for does not have a 401(k) retirement plan, then an IRA may be a great choice for you.

There are several types of IRAs, each with different advantages and limitations. Learn more about the differences between the two best-known IRAs in my related blog post: Which IRA is Right For Me – Traditional or Roth?

  • Traditional IRA – You make contributions with money that may be tax-deductible.  Any earnings can potentially grow tax-deferred until withdrawn in retirement.
  • Roth IRA – You make contributions with money that you have already paid taxes on. If certain conditions are met, your money may potentially grow tax-free, with tax-free withdrawals in retirement.  Once your income reaches a certain level, you can’t contribute to a Roth IRA.
  • SEP IRA – A Simplified Employee Pension (SEP) IRA plan is set up by an employer. The employer makes contributions directly to each employee’s IRA.
  • SIMPLE IRA – A Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is set up by an employer. Under this type pf plan, employees may choose to make salary reduction contributions, and the employer makes matching or non-elective contributions.

Financial experts widely estimate that up to 70-85% of your pre-retirement income may be needed in retirement. If you do have a 401(k) or other employer-sponsored savings plan, it might not be enough to accumulate the savings you’ll need. Contributing to both a 401(k) and an IRA can help alleviate this.  Investing in an IRA can also help you to gain access to a wider selection of investment options than your employer-sponsored plan.

The sooner you start contributing to an IRA, the better, thanks to the effect of compounding over time.  Compounding is the process in which an asset’s earnings (either gains or interest) are reinvested to generate additional earnings over time. Learn more about the magic of compounding in my related blog post: How Does Compounding Affect My Investments?

Contributing any amount to an IRA is definitely better than nothing, but to get the most benefit, you should try to contribute the maximum allowable each year. The IRS determines the maximum allowable, which can vary from year to year, and does not apply to rollover contributions. For 2021, 2020, and 2019, the maximum contributions you make each year to all of your traditional and Roth IRAs cannot exceed:

  • $6,000 ($7,000 if you are age 50 or older)
  • If your taxable compensation for the year is less than $6,000, then that amount would be the maximum.

Opening an IRA is a fairly easy process. First, identify which type of IRA is best for you. Then, choose a bank or other financial institution to hold your investments. You can usually choose the mix of investments on your own, or get help from your financial institution.

I have had Roth IRAs with Fidelity and TD Ameritrade, both of which have a wide selection of investment options and levels of investing advice.

Don’t delay, invest in an IRA today!

Disclaimer: This information is intended for educational purposes and is not tailored for the needs of any specific investor. It is important to conduct your own analysis and research before making any investment. It is recommended to independently research and verify or seek financial advice from a professional in connection with any information on this website before using it to make an investment decision or otherwise.

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