While many people have the benefit of participating in some sort of employer sponsored retirement program such as a 401(k) (check out The Best Way To Invest Your 401(k)), not nearly as many take advantage of the highly advantageous retirement vehicles available to individuals.An Individual Retirement Account, or IRA, is a great tool to use when planing for retirement.
Traditional IRAs
A traditional IRA is a tax-deferred account. This means that contributions are made on a pre-tax basis and reduce your taxable income. Taking money out of these accounts before age 59½ will cause the money to incur a penalty except in a few very specific situations. Taxes aren’t incurred until the point at which money is withdrawn from the account, allowing the money to grow tax-free.
Roth IRAs
Contrary to a traditional IRA, for Roth IRAs contributions are made on a post-tax basis. In a Roth IRA investments not only grow tax-free, but all of the dividends and capital gains made in the account are realized tax-free upon withdrawal. You can also withdraw the amount you have contributed to the account tax and penalty free!
My Recommendation
I personally suggest that you open a Roth IRA and contribute as soon as possible for as long as possible. If you have already saved up an emergency fund (60-90 days worth of expenses) the next best financial move comes in the form of a Roth IRA. This retirement tool is so good that you aren’t even allowed to contribute to a Roth IRA anymore once you make above a certain income ($133,000 as of 2017). The maximum contribution amount to either IRA type is currently $5,500 a year or $6500 a year for those age 50 and above.
The fact that you can withdraw contributions tax-free takes away the potential extreme downside of a traditional IRA: a situation where you end up having to tap into your retirement account and get penalized for doing so.
What Are You Waiting For?
Now that you know more about the options available to you I encourage you to pick the best one for your particular situation and start contributing today. The advantages of these investment accounts are really too great to pass up! If you are interested in learning how I invest my own retirement account check out my post here.
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I’d be interested to see what individual stocks you pick in your Roth IRA and how they change over time!