IRA
Individual Retirement Account (IRA)
An individual retirement account (IRA) is a common investment/trade account that people use to set themselves up for retirement. These accounts help individuals save for the long term by contributing a certain amount each year and choosing from various trading package to gain earnings. The primary goal of the IRA is to support those who may not have access to a qualified retirement plan through their job, also known as an employer-sponsored plan.
Such workplace retirement accounts, like a 401(k), are managed by employers, whereas most IRAs are self-managed by individuals who want to gain tax advantages and access financial investments like bonds, stocks, mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs). If you’re thinking of opening an account, keep reading to learn when to invest in an IRA.
Types of IRAs
The first step to IRA investing/trading is understanding the various types. Some IRAs may be more suitable to open at different times, depending on your age, current job, and goals for retirement. Here are the most common IRA account types:
Traditional IRA: Investors can use contributions to reduce their taxable income, but withdrawals are taxed as income when distributed during retirement. These accounts are suitable for those who think they may be in a lower tax bracket during retirement than they are currently.
Roth IRA: Contributions to a Roth IRA are not tax deductible, meaning they’re made with after-tax dollars. However, qualified withdrawals are entirely tax-free. This type of IRA may be ideal for someone who prefers to get their tax advantage later in retirement.
SIMPLE IRA: A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of employee retirement plan much like a 401(k). Employees can contribute to this account through salary deferral, and employers may match contributions to a certain percentage.
SEP IRA: Contributions to a Simplified Employee Pension Plan (SEP) IRA are tax deductible. SEP IRAs also offer tax-deferred growth on investments until retirement, when distributions are taxed as income. Small business owners generally use SEP IRAs for their employees because they gain tax benefits.
When Is the Best Time to Put Money in an IRA?
When it comes to opening an IRA account, the consensus is “the sooner, the better.” This is because the longer you can contribute to the account, the more potential you have to grow earnings that set you up for retirement. Contributing regularly also enables you to access certain tax advantages. The best times to open an IRA are when:
-You’re a young professional at the beginning of your career
-You expect your income to increase in the future
-Before income tax rates rise
For instance, the taxes you pay on contributions to a Roth IRA depend on how much you earn. For this reason, investing in this type of account is recommended when you’re young and making less money, as you will be taxed less. Investing your money as early as possible gives it more time to grow in value and potentially yield higher returns. However, once you open the account, you might be wondering at what point during the year to make your contributions.