Isn’t an IRA for When I’m Older?
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Isn’t an IRA for When I’m Older?

Posted on December 14, 2016 by Roberta Pescow at NerdWallet

When you’re in your 20s and 30s, work and family are probably your first priorities. Retirement concerns are often a side note. After all, there’s Social Security, and if you also have a 401(k) with an employer match, you might assume the situation is covered. Aren’t IRAs just for older people?

Given the average lifespan these days, you might have to do more to ensure a comfortable retirement. If you need to boost your savings, an IRA can be a smart investment, even if you’re a young adult.

What’s an IRA?

Individual Retirement Accounts (IRAs) are tax-advantaged retirement savings accounts. The government allows workers under age 50 to contribute up to $5,500 annually to an IRA. Those 50 and older may contribute $6,500 per year.

There are two major types of IRAs:

  • Traditional: Contributions to a traditional IRA are deducted from your total income when you file your taxes each year, so they usually get you a tax break right away. The deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels.

    Any working person under age 70½ can contribute to a traditional IRA, regardless of income. The IRS taxes withdrawals during retirement as income — but by then you should be in a lower tax bracket.

    You must begin taking distributions from a traditional IRA once you reach age 70 ½. You can’t make withdrawals until you’re 59 ½, without incurring a 10% penalty unless you qualify for an IRS exception. Traditional IRAs work well for those who earn enough to owe substantial taxes and expect their incomes to decline during retirement.

  • Roth: Roth IRAs make you delay tax gratification, but the reward can be worth the wait. You make contributions post-tax, but your investment grows tax-free, so you won’t owe anything when you make withdrawals in retirement. There are no age limits or required withdrawals, but income limits do apply, so if you’re a top earner, Roth IRAs might not be an option.

    You can withdraw your original contributions at any time without consequences, but if you withdraw earnings before age 59 ½, you may have to pay tax and a 10% penalty.

    Roth IRAs are wise for those who don’t need an immediate tax break or expect their incomes to be high during retirement.

Why open an IRA now?

The earlier you open an IRA, the more time you have to make contributions. Those contributions also have more time to grow.

Financial institutions, like TTCU The Credit Union, offer multiple traditional and Roth IRA options that give you a safe place to stash your retirement fund at competitive rates. If you have at least $1,000 to contribute, you may want to open an IRA certificate, but as little as $25 could get you started with an IRA.

Early IRA investing can improve your shot at retiring in style. If you make consistent annual contributions, you’ll be well on your way.

Consult your tax adviser for assistance.

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