IRAs can be a great way to save for the future.

It’s no surprise that IRAs are a popular investment option. After all, they provide a tax-advantaged investment plan that can reduce yearly tax bills. But, signing up for one without reading the fine print regarding its limitations and rules could mean you using it wrong. That’s why we’re here to give you all the information you’ll need about IRAs in the article below.

There are Different Types

The two types of IRAs are traditional and Roth. There is a clear difference between them with the main one being that Roth IRAs do not allow for tax-deductible contributions but traditional ones do.

This means that Roth accounts allow tax-free withdraws during retirement which could be beneficial for some.

Contribution Limits

It is important to note that there are limits on both types of IRA accounts. For the 2022 tax year, the maximum contribution amount was $6,000.

But, people fifty years old or over, are able to make an additional ‘catch-up’ contribution of $1,000. Just be mindful of your yearly contribution total as overpayments can result in penalties.

Tax Implications

Tax benefits are the main reason why IRA accounts are so popular. Traditional IRA contributions allow people to reduce their taxable income throughout the year. The tax benefit of picking a Roth IRA is that any withdrawals make in retirement are tax-free.

However, if a withdrawal is made before the age of fifty-nine the money will be taxed unless it’s being used by first-time homebuyers or for a medically approved purpose.

IRAs can Be Inherited

Many people don’t know that IRAs can actually be inherited. Beneficiaries are able to access any money that was not spent in an IRA account and put it towards their own retirement plan. Just be careful when dealing with this situation as the rules vary when it comes to inheriting an IRA account so it’s best to speak with a financial professional to understand what is required to gain access.

It Can Be Converted

If you have a traditional IRA account that you’re not happy with you might be able to convert it to a Roth IRA. This swap is ideal for people who expect to be in a higher tax bracket during retirement (since taxes won’t be owed on withdrawn money).

Your Employer Might Offer a Plan

For those who don’t have an IRA but are thinking of getting one, you should begin by asking your employer if they have a plan and what the details are. Although it is not typical for employers to offer, some do have IRAs as part of their benefits package so be sure to read up on all the details of your contract. Further, these plans vary depending on the employer since each outlines its own benefits and contribution limits.

Diversify Your Investments

The best way to maximize your investments is to diversify. Diversifying means you’ll be less at risk of losing money since it will be spread out across different classes (for example in stocks, real estate, bonds, etc.).

It’s also good to note that over time, your type of investments can change and you can rebalance your portfolio by reallocating these. Doing this periodically prevents a loss and can help keep you on track to meet your long-term goals.

Regardless of how you decide to invest, an IRA can be a phenomenal tool to get you to retirement. But, before you pick an account, it is important to discuss your current situation and retirement goals with a financial professional. Doing this will ensure you understand what you’re signing up for and that you’ll get the maximum return.

If you could use some help reaching your retirement goals give us a call at 407-328-5001.

Image: Unsplash