What Is An IRA?
The world of retirement can be a scary one. You are essentially investing your future into a long term plan that may or may not fail. We are going to discuss some options for you in the upcoming articles that may or may not be a good solution for you to grow your retirement and what they offer.
So what is an IRA it is short for an Individual Retirement Account. I utilizes certain tax loopholes so you can gain money without being penalized by certain taxes later on. There are two different types a Traditional and a Roth IRA. Today we will be discussing the Traditional.
The Traditional IRA comes in two seperate flavors in its own right. It can be deductible on your taxes or cannot be and that is dependent on your income, your marital status and if your employer offers a retirement plan. Sadly most of these criteria only work against you, not for you.
So What Is An IRA?
Basically it is paying someone else to invest your money into different stocks, bonds money market accounts, CDs and mutual funds on your behalf with no guarantee of return, and a deferred tax status on your income if you do make money. This is the benefit of a traditional IRA is that you do not have to pay taxes on your gains. Now this is not to say that you will not have to pay taxes ever remember the two constants in life death and taxes. when you reach the time of your life where you can withdraw from the account you then have to pay state and federal income taxes on what you get out of your IRA.
Rules Of An IRA
A Traditional IRA does not have an income cap on it. It does have a limit on how much you can contribute each year of 5,500 for people under 50 and 6,500 for people 50 and over. You can star withdrawal of your IRA at 59.5 years of age. You are also forced to do at least a minimum withdrawal at the age of 70.5. Your distribution is dependent on your balance in your IRA and your life expectancy. Like I said before you distribution will be hit by state and federal taxes so you will receive less than you expect.
Deductible vs Non-deductible
What determines if you are eligible for a deductible IRA vs a nondeductible IRA is many and varied here I will break it down for you.
- You are eligible for a deductible IRA if you are younger than 70.5 and have taxable income you and your spouse can contribute to the yearly contribution limit as long as you have no retirement through your job and if your spouse doesn’t work outside the home. If you are single just omit the spouse bit.
- If you do have a retirement plan through work you can still have a fully deductible IRA if you and your spouse collectively make less than 98,000 dollars and you file jointly or if you file individually and you make less than 61,000 dollars.
- Your deductions will be phased out if you one have a work retirement plan and make more than 118,000 dollars for married couples filing jointly or 71,000 filing individually, with 10,000 dollars being the cap for a married person filing separately.
- If you are not covered by a retirement plan but your spouse is then you get full deductions up to a combined income of 184,000 dollars but it gets phased out at 194,000 dollars.
What Are The Benefits Of An IRA?
The benefits of an IRA are when you reach the age when you can get distributions. You do have to pay taxes on your distributions but you did not have to pay taxes on anything in the IRA before that. This has one great benefit of the possibility of you being in a lower tax bracket or seeking out a lower tax state for your retirement. Most people fall in to this category so the IRA is best for them when they reach retirement age. Another benefit is it is hands off investing you don’t have to worry about what to do someone else will invest your money for you, hopefully getting you the best return you can get.
Upfront fees I wrote a post about 401ks and how they can be a horrible investment if you have too many fees. You see there are no laws forcing financial institutions to divulge the fees of a 401k this stems from the roll over of companies from pensions to 401ks and since the pension was managed and chosen by your employer rules governing the newer 401ks were kind of grandfathered in even though 401ks remove all the responsibility and risk of your employer and place it solely on your shoulders. Now IRAs are different they have to be transparent with their fees but most people do not know that so it behooves you to really look into the fees of any IRA you are looking into and make sure that they are fair and reasonable.
What Are The Bad Parts Of An IRA?
No liquidity of assets. Many financial advisors are against IRAs on the principle that you can not use the money put into your IRA until you are 59.5 years of age. You see if you want to withdraw any money from your IRA before that age you suffer a 10% penalty plus state and federal taxes on that money all at once. This makes using the assets of your investment horribly punishing and downright not worth it. Not to mention you are effectively stealing from your future retiring self.
You can have multiple IRAs but you cannot contribute any more that 5,500 or 6,500 if you are 50 or above combined.
Another detractor of the IRA is you are not in control of your money at all you give it over to someone else to invest how they see fit. Now in the previous section I listed this as a benefit but here I am now contradicting myself. You see if you want to accrue wealth you should take an active role in your money making. You should educate yourself and study what investments will net you the best money with the least amount of risk. The IRA removes you from the equation yes you can have some say in some of the investments but all in all you are out of control and that is kind of scary. The IRA is possibly your future and bad mistakes can ruin that. Now it is easy just hand your money over and be done with it hopefully you will be a millionaire by the time you are in your 60s, but who knows.
IRAs are market dependent if the market is doing well they do well if the market crashes they crash you see all the money you put into your IRA is not just sitting there doing nothing it is being invested in to the market in many different ways and it is all dependent on the right choices and the health of the market at the time. They sometimes say that you can stand to make 7% on your money but most experts agree those days are gone and a more safe bet is 4% and this is if the market does not suffer another crash like the housing market crash of 2006. I know many investors who’s net worth plummeted during that time and still have not risen back to what they originally were.
So Should I Invest In An IRA?
If you have an extra 5,500 dollars to invest that you do not know what to do with then yes. I would not expect it to grow to a tremendous amount but it could give you a nice cushion. If you are looking into being rich and well off for your retirement this is not the best vehicle for you. There are better options and we will discuss them later on.