You’ve probably heard by now that saving for retirement is one of the smartest things you can do with your money. After all, when your days of working that constant grind are over, gone too will be the steady paychecks every other week. Having enough savings to live, and live comfortably, in retirement is imperative for maintaining whatever type of lifestyle you’ve come to expect throughout your career.
One of the most common ways to save for retirement is through an high return investment known as an IRA — or an Individual retirement account. But what is an IRA, why is having one a good thing, and what are the different types of IRAs?
If you’re new to the game, then this may be confusing to you. Fortunately, Tactical Wealth is here to help.
In this blog, we’ll explore the different types of individual retirement accounts, why they’re important, and what you can do with the savings you accumulate for retirement.
What Is An IRA?
IRA accounts are not direct investments into the market. Rather, they are simply a “basket” where you keep stocks, bonds, mutual funds, and other assets, which can grow and generate returns as you contribute over a set period of time. Typically, your IRA account will be brokered by a well-established company, and their team of brokers will aggressively invest your funds at first before getting more conservative and risk-averse as you near retirement.
Why Do I Need An IRA?
You don’t need one, but they’re extremely beneficial to have. An IRA, or similar retirement account, allows you to make contributions at a pace you’re comfortable with, which then grow at a fairly healthy rate over the course of your investment. But the best thing about an IRA is that they allow your money to grow in a tax-deferred manner, meaning all of the income from interest, dividends, and capital gains is free from being taxed each year. From there, you can choose to save on taxes when you contribute or when you withdraw your money, depending on whether you choose a traditional or a Roth IRA. While there is a cap on how much you can contribute to your retirement yearly, it’s usually a fairly reasonable amount (around $5,500 per year for people under 50).
What Are The Different Types?
There are a whole bevy of different options when it comes to retirement accounts, but typically you will only have to choose between two different types of IRA accounts: Traditional or Roth. The pros and cons of each are easy to understand, as long as you know what you’re looking for and how well you’ve thought out your retirement plan. Both of these savings vehicles offer powerful tax benefits, just in different ways. Now, which one of the two common options should you choose? Let’s dive in.
Traditional IRA Benefits
When you opt for a traditional IRA account, you’re banking on the fact that your tax rate will be lower when you hit retirement. This could be the case if you’re already nearing retirement and don’t anticipate moving up into a higher tax bracket now or later in life. With a traditional IRA, you’ll be able to save in the long run by having your contributions be tax-deductible right up front. That means you’ll pay taxes only when you withdraw your earnings in retirement, not when you make contributions. This type is beneficial if you’re in a higher tax bracket now than you will be when the time comes to retire, though there is also a required minimum distribution age of 70 ½.
Roth IRA Benefits
Conversely, a Roth IRA account allows you to pay taxes on your contributions now, when you’re in a lower tax bracket, so that you can withdraw them and reap their full benefits later in life. This allows you to get the cuts on your earnings out of the way now, so that you won’t have to pay the price (literally) when you’re possibly earning more and in a higher tax bracket. There are no penalties for early withdrawals, given that you meet a certain set of criteria (i.e. had an account for five years, you’re at least 59 ½ years old, or you’re using a chunk of change towards a first-time home purchase). A Roth IRA is typically a smarter investment for those looking to start saving at a younger age, and another benefit is there is no minimum distribution age, so you can let your money sit in there for as long as you need.
What About A 401K?
Yes, there are many other common forms of retirement funds, including a 401K. However, the main difference between a 401K and an IRA is that a 401K is typically an employer-sponsored retirement plan. This is a great way to get started on saving for retirement, especially because there is a chance that your employer might match your contributions up to a certain percentage. A 401K is more akin to a traditional IRA, in that you will pay taxes on your withdrawals later in retirement as opposed to paying them now. But the best part about the 401K as opposed to an IRA is this: You don’t have to choose one over the other. In fact, it’s wise to make contributions to both to maximize your chances for a high return investment and comfort in retirement.
Leveraging Your High Return Investment
Whether you opt for a traditional IRA, Roth IRA, 401K, or some combination of the three, the ability to maximize your savings doesn’t stop there. When you are at or near retirement, it’s wise to explore your annuity options, in order to supplant your previous income with a stable, consistent form of payment each month. When it comes to a high return investment you can count on, consider the Tactical Wealth Fixed Income Fund. You can invest in our stable fund with your IRA, 401K, SEP, or other qualified retirement account and receive high interest rates and generate a stable monthly return on your investment. Contact Tactical Wealth today to learn more about investing your IRA or 401K, and experience peace of mind in retirement.