Did you know that one in three Americans has nothing saved for retirement?
While it is better to start saving for retirement sooner rather than later, it is never too late to start saving. The best way to begin saving for your retirement is through an Individual Retirement Account or IRA.
What is an IRA?
An IRA account is a savings account that has several large tax breaks, which makes it an ideal way to save for retirement. IRAs are often mistaken for an investment, but this is not true. An IRA is the basket you keep all your retirement assets in. Two of the most popular types of IRA are traditional and Roth, and for both Roth and traditional IRA your money grows tax free. This means that you don’t have to pay taxes on income from interest, dividends, or capital gains that may compound.
What is the Difference Between a Traditional and Roth IRA?
The main difference is when you pay income taxes. With a traditional IRA you don’t pay taxes until you withdraw the money, which can be helpful if you are in a higher tax bracket now than you would be when you retire. In Roth IRAs you pay taxes when you put money in, but that means you don’t have to pay taxes when you take the money out. If you have a generous sum in your Roth IRA, this can save you lots of money!
How Much Can I Put Into an IRA?
The tax breaks on IRAs are only available because the government limits how much money you can put into an IRA annually. The amount changes with inflation but is currently $5,500 a year until you’re 50. Then you can contribute an extra $1,000 a year to “catch-up” if you need to. You don’t have to contribute your entire $5,500 to one IRA a year but can split the money between different IRAs. There is also no minimum to how much you need to put into your account each year.
How Much Money Will my IRA Earn?
How much your IRA will earn is extremely variable, depending on what type of IRA you have, when you open the account, what your annual contribution is, and your age of retirement among other factors. You can use financial calculators to help figure out exactly how much you could save. For example, if you open a Roth IRA when you’re 25 and make your maximum contribution of $5,500 the first year, even if you never make another contribution again, at the age of retirement of 65 your account would be worth $94,293. So, you can see, just opening an account and leaving it alone can yield a large amount of money for retirement.
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