A Guide to Taking Advantage of Your IRA account

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IRA

IRA or Individual Trading Accounts are one of the tax-advantaged savings alternatives that individuals can use to achieve a financially secure retirement. IRA accounts can offer different levels of risks, rates of return, penalties for early withdrawals, maturity periods, fees and minimum contribution limits. There are two types of IRAs, Roth IRAs and Traditional IRAs. Roth IRAs do not offer tax deductions for the amounts contributed, the distributions and earnings from a Roth IRA are not considered taxable income. 

On the other hand, Traditional IRAs generally offer a tax deduction for contributions to the account and the earnings are allowed to grow tax-free. Distributions from a Traditional IRA are considered taxable income. 

However, taxation is deferred to retirement when tax brackets are lower. Some of the best IRA accounts come in both traditional and Roth IRAs. 

How to make the most out of IRA savings

Once an individual has decided which IRA is right for him or her, the next step is to ensure that they take full advantage of them. Some of the steps they can take include the following. 

Baby Boomers can catch up

“Baby-boomer” refers to a member of the demographically large generation born between the end of WWII and the mid-1960s. The catch-up contributions give those approaching retirement the ability to make up for missed contributions. Individuals must turn 50 by the end of the contribution year to be eligible. For instance, an IRA holder who turns 50 on December 31st will be eligible for a catch-up contribution for that year. This is even if funds are deposited earlier in the year. 

Spousal contributions

Spousal contributions are a method for wage earners to put aside funds for a non-working spouse’s retirement. A couple may contribute the annual maximum in each spouse’s IRA as long as one spouse earns at least as much as the contributions when combined. 

An early start

Individuals should look to invest more money at an earlier age. This will give retirement assets more time to grow. 

Funding IRAs early in the year

The deadline to make IRA contributions is always April 15th of the next year. However, one can fund their IRA as early as January 1st of the current year. This way they can capture an additional 15 months’ worth of interest or earnings, which can result in a dramatic difference over time. 

When to consolidate IRA accounts?

It’s very common for people to have multiple retirement accounts. This can include IRAs opened over the years of the account balances left in the plans of former employers. Together, these assets may represent something significant. Some of the reasons to consolidate IRA accounts. 

Comprehensive investments

It is normally difficult to maintain an investment strategy which is an accurate representation of one’s goals, timing and risk tolerance with assets spread across multiple financial institutions. A single account can make it easier to determine whether a portfolio aligns with the investor’s retirement goals. 

Investment flexibility

A self-directed IRA generally offers the ability to choose from a wide range of products such as stocks, bonds, mutual funds, annuities and more.

Simplified tracking

It is easier to monitor one’s progress and investment results when their retirement savings are in one place, as it will generate one statement instead of several. This simplifies things by providing a comprehensive report of all owned investment vehicles. 

Lower costs

Reducing the number of accounts owned may also reduce account fees and other investment-related charges. Dealing with one account instead of several can simplify the distribution process. This includes complying with complex minimum distribution rules when one reaches 70 and a half. Also one can avoid the risk of losing track of retirement accounts or access to the account assets in case a former employer merges with another company or goes out of business. 

Conclusion

IRAs can be a valuable tool for saving for retirement. The wide range of account features and investment options can make it challenging to select the most appropriate IRA. There are many educational resources available to educate people about the best IRA accounts to choose for this year.

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