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When it comes to saving for retirement, you have many different options. You can tuck money away into savings accounts, invest it in real estate, or contribute to a 401(k) program. Each one of these strategies is a valid option. However, if you limit yourself to these investments, you could miss out on important advantages. Individual retirement accounts or IRAs offer a range of benefits.
There are two types of IRAs. Traditional IRAs allow you to invest as much as $6,000 per year ($7,000 for people who are 70 or older). You only pay taxes on your investment when you get a withdrawal from your account. Your contributions are tax-deductible as long as you meet certain income level requirements.
There is also a Roth IRA. This investment uses post-tax dollars, so there is no tax deduction available. Your contributions simply grow tax-free, and you do not have to pay taxes on any withdrawals you take from your Roth IRA account as long as you meet certain requirements.
It’s easy to set up an IRA online. We’ve collected the best online IRAs here. Read below to see why you’ll want one, if you don’t have one already.
When you choose a Roth IRA, you set yourself up to enjoy a variety of different benefits. Let’s go over each one in turn.
Roth IRAs let you contribute $7,000 per year when you are 50 or older – that could mean 20 years of an extra $1,000 in contributions if you choose a Roth IRA over a traditional one.
The money you invest in a Roth IRA is yours. While it will grow over time, you can always deduct your original investment amounts without penalty. You can access your earnings as soon as you reach 59 and six months. In either case, you won’t have to pay federal taxes on your withdrawals.
You can access your Roth IRA earnings to pay for health insurance premiums if you are unemployed, purchase a home (first-time buyers only), pay certain medical expenses, and more.
When you invest in certain retirement accounts, like a 401(k) or a traditional IRA, you will be required to start taking distributions when you reach age 70 and six months. You do NOT have that limitation with a Roth IRA. For some people, this can mean important estate planning benefits.
The Roth IRA is one of the most popular options for retirement savings, but it is not for everyone. There is a matter of adjusted gross income or AGI. For 2019, single taxpayers have to make less than $122,000 per year to contribute the max possible while married taxpayers are capped at $193,000. If your earnings are close to those figures, you may be eligible for reduced contribution.