The Secret to Retiring In Comfort
A great way to save for retirement that you can start as young as age 18, now that’s planning ahead! Investing in an Individual Retirement Account (IRA) helps save funds without having to pay high taxes. Unlike 401k’s, an investor does not have to pay taxes on profits when they finally withdraw their funds. Although there are separate types of IRA’s, the most typically used for college savings are Roth IRA’s and Traditional Deductible IRA’s.
An IRA can be opened at most banks, as well as many investment/brokerage firms as well. The latter is emphasized because of the likelihood of wider investment options such as stocks, bonds, mutual funds, and certificate of deposits (CD’s.)
How IRA’s Work
You can contribute up to 5k per year (Under age 50) and make profits through IRA investment options such as bonds, mutual funds, as well as stock market investment. Depending on the type of IRA you open, a maturity date is set for when distribution of the funds will begin, typically when the investor is 59 ½ years old. While the funds are in the IRA, the interest and profits they compound will not be taxed. Depending on the type of IRA, once the maturity date is reached, the investor can withdraw funds from the IRA with the profits untaxed.
Like similar investment tools, you contribute to an IRA with several factors coming into play. Variables such as:
-Tax Filing Deadline for Contributions: April 15th
-Type of IRA
-Age of contributor (Max contribution under 50: 5k. 6k for those above.)
-Salary of Contributor
-Availability of Retirement Plan from Employer to Contributor
If funds are taken out before the maturity date there is typically a 10% early withdrawal penalty fee. However, if the funds are taken out for educational expenses like college tuition and required materials, the fee is waived.
The other benefit to saving for retirement this way is that money invested in an IRA does not need to be reported and therefore will not affect income taxes.
*An important note is that even if used for educational purposes, funds taken out prematurely will be taxed as normal income.
Types of IRA
Traditional Deductible IRA
-Full amount of distributed funds will be taxed as income if drawn before 59 ½.
-Withdraw any portion of contributions at any time, untaxed and without penalty.
-Earnings portion of distributed funds will be untaxed if drawn before59 ½.
Both IRA’s allow the investor, if they’ve had the IRA for a minimum of five years, to withdraw funds completely untaxed if passed the age of 59 ½.
By investing money into an IRA you cannot only save, but also begin to compound interest and profits towards your retirement, right from the comfort of your own home.
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