A new year always brings thoughts of the future. This year, a lot of people are focusing their wishes on a safe and healthy 2021, and we’ll fervently salute to that.
It’s also a good time to look beyond the coming year and set some long-term intentions for your financial future. For example, have you considered supplementing (or starting) your retirement fund with an Individual Retirement Account (IRA)?
An IRA is one of the many tools you can use to grow your wealth over time. Most people associate retirement with their 401(k), but an IRA can augment your employer-provided retirement plan — or replace it if you don’t have one — and provide some additional benefits your 401(k) doesn’t offer.
Here are five reasons you might want to start contributing to an IRA:
1. Level up your savings
A sound savings strategy is the key to building long-term wealth. There are a lot of different ways to save, and each has an important role to play in your savings plan. Most people start with a savings account, which is ideal for short-term goals, providing ready cash when you need it. Step two is maximizing contributions to your 401(k), which helps lay the foundation for your retirement fund through matching employer contributions.
Opening an IRA takes your savings to the next level by raising the ceiling on how much you can set aside per year, adding an extra layer of retirement security and maximizing the use of compound interest to grow your retirement fund.
2. Get a tax break
Many people choose to open an IRA so they can enjoy the tax advantages it offers. Contributions to a traditional IRA are typically pre-tax, which means they can lower your taxable income by the amount you contribute — up to $6,000 a year if you’re under 50 or $7,000 if you’re older. That means you may be able to enjoy some tax relief now while building your nest egg for the future.*
Alternatively, you can choose not to take the tax deduction now so you can enjoy tax-free withdrawals after you retire. With a Roth IRA, you pay the taxes upfront and your money remains more accessible in case you need it before you retire.
3. Diversify your investments
Retirement portfolios have their ups and downs over the course of a lifetime. Diversifying, or spreading your money across multiple types of investments, helps make your portfolio more resilient, allowing it to weather the ups and downs and come out ahead in the long run.
If you want a more robust retirement fund, adding an IRA on top of your 401(k) provides even more options for diversification, especially since IRAs typically offer more investments to choose from based on your financial goals.
4. Fill in the 401(k) gap
Not all employers offer 401(k) plans — and when it comes to saving for retirement, gig workers and small business owners are typically on their own. An IRA fills the gap, allowing anyone to start their own retirement fund at any time, regardless of their employer options as long as they have earned income.
You may be wondering what is earned income and how does it impact how you contribute to an IRA? Maximum contribution amounts are set by the Internal Revenue Service (IRS) based on age; they also require that you have taxable income that surpasses your contributions. In other words, you can’t contribute more to your IRA than what you’ve earned.
Preparing for retirement can take longer without a 401(k), which is why it’s important to start as soon as possible. Every year you contribute is an extra year of compound interest to help grow your balance.
5. Take control of your retirement
The biggest difference between a 401(k) and an IRA is that a 401(k) is an investment your employer offers to you, while an IRA is an account you open for yourself. With an IRA, you have more control over your investments. Plus, your retirement savings won’t be affected if you move to another job.
If you’re transitioning to a new employer, don’t leave your previous employer-sponsored 401(k) behind. By rolling over your 401(k) into an IRA, you’re able to determine the right investment options, lower fees, and improve management and communication.
If you’re thinking about opening an IRA, you may want to keep an eye on some of the federal laws that determine when and how you can use your retirement account. Some laws have been added or changed since the pandemic started — specifically the CARES Act, intended to help those affected by COVID-19, and the SECURE Act, which retools the way retirement plans are handled. Both included important changes to IRAs.
Once you’re ready to get started, our team is here to help you consider all the options so you can make the right decision for you. We’ll also help you navigate the shifts and changes in the IRA environment and be there to support you throughout your financial journey so you can stay on track toward your financial goals.
Want to learn more about IRA investment options outside traditional IRA savings and CDs? Connect with our Investment Services team today.
* Please consult a tax advisor regarding whether this would benefit you.