Nearly 10,000 baby boomers are retiring every single day. And in order to prepare for their Golden Years, many financial experts are advising them to open an Individual Retirement Account (IRA). What is an IRA?
Are there any other good reasons for opening an IRA account? We will explore these retirement planning issues, along with the differences between the Traditional IRA, Roth IRA and 401(k) plans in this IRA Guide. Plan your future with wise financial planning today.
What is an IRA?
What is an IRA? An IRA is a legal, financial retirement construction, permitted by the Internal Revenue Service (IRS) to provide significant tax advantages to the elderly. These IRAs have been in existence for decades – they are well-established.
Man is a creature of habit. You might be surprised if someone with a video camera secretly followed you around all day long. A video recording of your daily routine would reveal a myriad of unconscious spending habits.
Psychologists have asserted that if you force yourself to engage in a certain action for two weeks, it will become ingrained in your psyche. Therefore, after developing lifestyle spending habits for 65 years, you might need some time to adjust your behavior for retirement.
It can be difficult to accept, but your income will be lower during retirement (in 99% of circumstances). You may need to buy income-producing investments to make up the difference. It’s best to do this now, while you still have surplus cash from your job.
What is an IRA? It is a vehicle to teach you new saving habits. You will need to be more frugal during retirement. That is a requirement.
Because unfortunately, retirement savings are very difficult to replenish. Therefore, in order to be truly prepared to live out your Golden Years, you need to engage in retirement planning ahead of time, like yesterday. That is why some believe you need an IRA account.
Give a man a retirement cheque and you pay for his bills today; allow a man to open an IRA account and he can his bills during his Golden Years.
What is an IRA? It is a financial account, which has been specifically constructed legally to permit you to save money by deferring tax liabilities. The Internal Revenue Service offers you a trade-off: you don’t have to pay certain taxes, but you will gain retirement savings. How does the IRS benefit from this arrangement?
It is not simply the IRS that benefits, but the entire Federal Government. The Federal Government has promised to pay retirement benefits through Social Security. Therefore, if you are able to sufficiently save for your own retirement, then you won’t need Social Security.
The Federal Government saves money because it doesn’t need to pay Social Security to self-sufficient, DIY retirees. The country was founded on self-sufficiency and an IRA account is part of that ideology.
What is an IRA? It might be seen as an Individual Retirement Arrangement allowing you to maximize your standard of life during your Golden Years. By saving money, you can still have extra money for going out to eat at restaurants, taking vacations and helping family members. But, it takes pro-active retirement planning to make it happen.
Is an IRA the Same as a 401K?
Learning the retirement planning terminology is one of the hurdles that everyone faces. It can be very challenging because IRS terms have very strict definitions, which might differ from everyday common English phrases. The IRS definitions have both financial and legal importance.
For example, you might have heard about 401(k) plans and wondered if these were the same as IRA accounts. Both can assist with retirement planning, but they are substantially different.
A 401(k) plan is controlled, sponsored and directed by your employer. The employer and employee might have matched contributions to increase the total value more rapidly.
If you change jobs, the law allows for 401(k) portability. But, you must fill out paperwork to take advantage of moving your 401(k) with you. This 401(k) plan has a higher contribution limit of $19,000 per year for 2019. IRA 2019 contribution limits are only $6,000.
What is an IRA? It is like a cornerstone for building your retirement savings upon a tax-friendly foundation. Experts have found that 35% of individuals do not have an employer’s retirement plan to fall back on. Therefore, the IRA account can be used to fill this gap.
Can Anyone Open an IRA?
Wise people buy an umbrella when the sun is shining. Wise investors plan their retirement when they are young. It can be counter-intuitive, but that is how billionaires are made.
Billionaire Warren Buffett focuses on valuable long-term investments. He buys blue-chip corporate stocks when others are selling them. The same is true for wise retirement planning.
Believe it or not, you can open an IRA as soon as you have a job. Therefore, it all depends on when your state allows teenagers to start working as to when you can open your first IRA account. Earning income from employment is the primary determining factor in your eligibility for opening an IRA account.
What is an IRA? It can act as an umbrella during a rainy day or more specifically, it can be your rainy day fund, should anything turn sour. You need some place to stash your wealth.
In 1974, the Traditional IRA was established. This IRA includes contributions, which might be either tax deductible or not tax deductible. There is more flexibility in the Traditional IRA than there is in the Roth IRA.
The 2019 Traditional IRA annual contribution limit is $6,000 for those below 50 and $7,000 for seniors over 50 years old. Every year, the limit is likely to rise due to inflation. These IRA accounts provide a tax deduction for the year in which the income was earned.
The age limit for the Traditional IRA is below 70½ – it has no income limitations. This means that at the age of 70½, you must start to make minimum withdrawals. If you withdraw from your Traditional IRA, record it on IRS Form 1099-R.
In 1997, the Roth IRA was introduced to provide after-tax benefits for retirees. Just like a Traditional IRA, the Roth IRA 2019 annual contribution limit is $6,000 for those below 50 and $7,000 for seniors over 50 years old (this $1,000 is called a catch-up contribution).
Unlike Traditional IRAs, Roth IRAs are always tax-free. Roth IRA contributions are made after taxes, so there is no tax deduction. You must wait until after 59½ to withdraw funds, then the earnings will not be taxed. But, you are not forced to withdraw funds at any set age.
The Roth IRA provides tax-sheltered growth with no age limit. Unfortunately, there are 2019 income limitations as follows:
- Single filer income threshold phase-out ranges from $122,000 to $137,000
- Married filing jointly phase-out ranges from $193,000 to $203,000
If you withdraw from your Roth IRA, record it on IRS Form 1099-R. You must record the amount on your taxes, but it will not be added to your taxable income.
Calculating IRAs can be very complicated due to all of the variables. Thankfully, there are many IRA Calculators to choose from. You can contact a team member at Mink Wealth Management to figure out how much your IRA account will be worth.
The sooner you start, the better. Compound interest will have a multiplier effect on the total retirement amount. Here are the factors that go into the total value of your IRA account at retirement:
- Starting Balance
- Annual Contribution
- Current Age
- Age at Retirement
- Adjusted Gross Income
- Rate of Return
Your annual contribution will be determined by the IRS threshold for each year. It is at $6,000 for 2019. Those who are over 70 have a catch-up annual contribution level of $7,000. Basically, the government is allowing you to “catch-up” for not starting to save for your retirement earlier.
Age at retirement is when you hope to retire. Each IRA account will have its own rate of return. Find one that best suits your risk tolerance and retirement goals.
Where Do I Get an IRA?
You might be able to find an IRA at nearly any financial institution, which offers some retirement planning accounts. These include banks, credit unions, brokerage firms, mutual fund superstores, and lenders. Although all may offer IRAs, these will vary dramatically.
What is an IRA? The IRA account provides you with tax savings on your investments. Therefore, each IRA account might have many different types of assets therein.
There are IRA providers found both online or offline. Determine which is better for your purposes. Some online providers might be more affordable with more anytime access.
Questions to Ask Providers
Finding the right IRA provider is an essential step to earning the healthiest returns. Here are Frequently Asked Questions (FAQs) for your provider:
What is your retirement investment philosophy?
You will want to find the best fitting IRA provider, sharing a similar investment philosophy as you do. Share your risk tolerance during discussions.
Do you have account minimums?
See if there are both initial account minimums and annual contribution minimums. Some might penalize you if you do not contribute enough each.
What are your management fees, trading fees, and annual fees?
Determine how often the account manager will execute trades for your account. Ask if there are multiple account managers. And ask for the account manager’s name, phone number, and email. Search for hidden fees.
Do your trading fees change based on the number of trades executed?
If the account charges you more for more trades, then you will start to understand their trading philosophy. Conservative IRAs will try to dissuade frequent trades in order to build up long-term wealth gradually.
Can I get remote mobile access to my account using my smartphone 24/7/365?
You might want to buy or sell an asset during off hours. This could be very lucrative. Now, is the time to determine the level of financial technology available.
How are advisers paid?
See if manager pay is commission-based. If so, they might try to engage in more aggressive sales techniques.
What types of investments are purchased for accounts?
Do they have stocks, bonds, ETFs, commodities, and cryptocurrencies? Ask about foreign and domestic assets. Who determines which assets are available?
Do you have educational resources that I can use?
You might want to learn more about certain assets or IRAs in general by reading online or offline education resources, videos or webinars. Knowledge is power. The best IRA providers should be transparent, knowledgeable and helpful. They should want you to succeed.
Do you have any personal concierges offering one-on-one help?
Eventually, you might have a very specific question that needs answering. How much will you need to pay for personal coaching?
Are IRAs Good Investments?
What is an IRA? This type of account does not guarantee any specific investment rate of return. It primarily offers important tax benefits for any investment gains that you do enjoy. Finding the best IRA provider will help you optimize your rate of return.
Furthermore, you will also need to discuss your risk tolerance with your wealth adviser. Your risk tolerance determines how conservative or liberal you are. Financial experts will look at your age and use this as a determining factor in the type of investments, you should add.
Usually, younger people are in their prime income earning years and might be able to recover any losses. Therefore, they can add more high-risk investments, like corporate stocks. High-risk investments should deliver high rewards.
As you get closer to retirement, you should add more low-risk bonds and reduce the high-risk stocks in your wealth portfolio. In the final years before retirement, you might want to concentrate on adding icing to the cake – finding a reliable, stable revenue stream. That is a standard prudent retirement strategy.
Find an investment account manager that shares your ideology. You need someone that you can trust for the long haul. These are some of the factors that lead to the largest retirement nest egg:
- Starting Early
- Initial Funding
- Yearly Contribution
- IRA Type
- Investment Selection
Starting early provides you with the best returns based on compound interest. Compound interest has a multiplying effect that becomes dramatic over time. Let your IRA account grow and it might surprise you by its size when you are ready to retire.
Hindsight is 20/20.
Billionaires did not make all of their money in their final years. They have been accumulating wealth their entire lives. The IRA account gives you the means to reduce your tax liability, which should improve your growth rate because you have more money invested.
Starting early, regular contributions and astute investing can provide you with the best retirement nest egg. Think about what you want to accomplish. The IRA account can create a great tax-friendly retirement platform. It all starts with sizable initial funding. You need to start off on a good foot. The compound interest will increase the principal dramatically. The yearly contribution should be dictated by your years to retirement. What is an IRA? It is like a savings jar to ensure that you don’t spend all of your wages on consumption. There will be different expectations for a Traditional IRA or Roth IRA. Select the best one for your purposes. Investments will undergo market fluctuations, gyrations, and changes. You need to engage in agile risk management. Risk management is a requirement for anyone making any type of investment.
Many wealth planning advisers will encourage you to include assets with tax benefits. These assets should lower your tax liability, leaving you with more money fully invested in the long run. What is an IRA? An IRA has a built-in tax benefit. This is why IRA accounts can be a great foundation for a healthy retirement nest egg.
An IRA can also be a treasure chest for your savings. It teaches you how to save money, so you have something left for retirement. An IRA account is a rainy day retirement fund with tremendous tax advantages.