Paying bills is part of adult life, regardless of your age. While you have a job, the money is constantly coming in, and budgeting is easier. Therefore, it is vital to prepare for retirement while you are still working because bills never go away. Many have heard the term “IRA” but do not fully understand how helpful these savings accounts can be. Before you invest in an IRA savings account, consider these five surprising facts.
Fact #1 – Seven Different Types
There are actually seven different types of IRAs.
- Traditional – Most common. Depending on age and income, it can be tax-deductible, making it ideal for people who do not have a retirement plan available through their workplace.
- Roth – Not tax-deductible, but withdrawals are not taxed. The maximum contribution per year is between $6000 and $7000, depending on age. This is ideal for people who will want to withdraw at any time without penalty.
- Simplified Employee Pension (SEP) – Variant of traditional, but funded by the employer who receives tax incentives. They grow tax-free, but you pay taxes on them. Very high max contribution limits, and employers must give equally among all employees. It is only an option for employees who have put in at least three years of service to the company.
- Nondeductible – Built with net income only, but taxes are deferred on the growth of the IRA. Only pay taxes on the amount withdrawn.
- Spousal – Perfect for couples who file jointly with taxes, and one is not working. The contribution must not exceed the amount of annual income but can be funded by either partner.
- Savings Incentive Match Plan for Employees (SIMPLE) – Similar to SEP, but better for low cash-flow companies.
- Self-Directed – Ideal for freelance contractors and requires a trustee who is experienced in investments.
Fact #2 – Minors Can Own an IRA
The only requirement for an IRA is to have a source of income. Therefore, minors with a job can start an IRA. The maximum annual limit is set to $6000, so it is a great way to start preparing for retirement. The best thing about this savings account is the fact there is no minimum contribution requirement. This means if you do not make enough money to donate one year, you can let it sit until you can contribute again.
Fact #3 – Multiple IRAs Allowed
IRAs have a max annual contribution limit of $6000 to $7000, depending on age. However, as long as your cumulative contribution is under that, you can possess multiple IRAs. This is ideal if you are looking at opening different kinds of savings accounts, such as Roth and a traditional. How you separate it is up to you, but it must stay under the max limit.
Fact #4 – Does Not Conflict with 401k
IRAs and 401k plans do not conflict, making it possible to have two growing at the same time. Your income will be the deciding factor on tax-deductible statuses. In addition, note that income limits are also based on marital status. It is important to talk to a financial consultant if you are married and looking at owning both an IRA and 401k.
Fact #5 – Only a Third of Americans Own an IRA
Surprisingly, according to the experts at SoFi Invest, “only a third of adult Americans currently have IRA savings accounts open.” Many know the benefits but think they do not make enough to set money aside. With the many types of accounts available, and the ability to let them sit dormant, it is always good to speak to a professional about getting one started.