An Individual Retirement Account is a retirement saving and investing tool that is tax-advantaged. Oftentimes a workplace retirement plan such as pensions or 401(k) aren’t enough to provide you with enough income in retirement. If you’re thinking about starting to invest in an IRA, keep reading to learn how they work
You can open up an IRA at a bank, robo-advisor, or a broker. If you open an IRA at a broker or a robo-advisor, you’ll be able to invest in stocks and bonds, while IRAs with banks tend to offer certificates of deposit and savings accounts. The growth of your account balance over time depends on how you invest and how much you contribute to the account overall.
Investments made to traditional IRAs are tax-deductible. For example, if you put $6,000 into an IRA, your taxable income decreases by the amount of the contribution. When you withdraw the money from the account during retirement or after the age of 59 ½, those withdrawals are taxed at their ordinary income tax rate.
In order to contribute to your account you or your spouse must have earned income. Individual contributions to a traditional IRA cannot exceed $6,000 in most cases, but if you are 50 or older, you can contribute up to $7,000 per year. Your income and whether you have a retirement plan influence which types of IRAs you can open and whether your contributions will be tax-deductible.
If you or your spouse have a retirement plan at work, the amount of your traditional IRA contribution that you can deduct is reduced, or eliminated altogether, once you hit a certain income. You can still make contributions, but they won’t be tax deductible. If you and your spouse (if you have one) don’t have retirement plans at work, then you can deduct your IRA contribution no matter how much your income.
There are other types of IRAs that are for self-employed or small businesses called the SEP IRA and the Simple IRA. We will go over these in our next blog post coming soon.