Contributing to an Individual Retirement Arrangement (IRA) is an excellent way to grow your financial wealth over time.
In fact, if you don’t have one, you may be missing out.
1. Contributions can be made anytime – but the sooner, the better.
Personal finance experts often talk about the “time value” of money – how investing earlier in life will generally do you more good than trying to catch up later.
If you put money in an IRA while you’re still in your 20s and get a reasonable rate of return on your investments, you’ll take maximum advantage of the compounding effect of return on your money. By paying yourself first and contributing to retirement funds for the rest of your working life, you should be in good shape when you retire.
Best of all, you won’t need to panic when you reach your 50s or 60s and realize you haven’t saved enough to retire.
2. Significant tax advantages are available.
IRAs come in two different forms. With a traditional IRA, all contributions are pre-tax and reduce the current year’s income by the amount of your contribution. When you take the money out of retirement, you pay ordinary income tax on your withdrawals.
The newer form is the Roth. With this plan, you can’t take a deduction for your contributions and you must pay tax on the amount invested now. However, after you retire you can withdraw the money tax-free.
Determining which plan is better depends on when you want to be accountable for paying the taxes.
If saving on taxes now is good motivation for you to make contributions, by all means, use a traditional IRA. If you’re more motivated by knowing your IRA retirement income – including earnings on your contributions – will be tax-free during your retirement years, go for the Roth.
Either way, the best IRA is the one you consistently contribute to.
3. Multiple investment options are accessible.
It’s often easy to open an IRA account at your bank or investment brokerage. These institutions typically let you invest in money market funds, mutual funds, stocks and so on.
However, you’re not limited to just these investments. You can invest in certain coins (although they must be held by a custodian), in mortgages, real estate, and many other investments. As you look for the right institution, make sure they allow the type of investment you prefer.
4. You are in control of your IRA.
Even if you have a 401(k) or similar plan at work, investing in an IRA is a good idea. That’s because the account is in your name and under your control. If you change jobs, it’s not affected.
Another reason you may want an IRA is to roll over and consolidate old retirement accounts. For example, if you have old 401(k) or similar plans at places you used to work, you can roll them over into your IRA.