An IRA known as an individual retirement account is a tool used to build retirement savings. IRAs offer direct access to investments, in addition to tax advantages. Many individuals are aware of these accounts but are not sure which option is most optimal for their personal situation. Either IRA you choose is like a “sale” on the overall tax rate you are paying on the money your earn. You just have to decide if you want to take the discount today, or the discount in the future, the choice is up to you.

Determine the Right Type of IRA for You.

For most circumstances you have two basic options when it comes to IRAs: a Roth IRA or a Traditional IRA. The annual contribution limits for each is the same. For 2021, the IRS caps IRA contributions at $6,000, though account holders age 50 and up have a slightly higher limit of $7,000 with catch-up contribution.

With a traditional IRA, your contributions may be partially or fully tax-deductible. This is dependent on your income level, filing status, and whether or not you’re covered by an employer’s retirement plan. But when it comes time to withdraw from your traditional IRA in retirement, you’ll have to pay income taxes.

On the other hand, the assets in a Roth IRA grow tax-free. This is because Roth IRAs are funded with after-tax dollars. That means account holders will have already paid taxes on the money they deposit in the account. While that means withdrawals in retirement will be tax-free, you won’t get to deduct contributions from your income now.

If you’re young and you expect to be in a higher tax bracket in retirement, opening a Roth IRA may be a good idea. But for anyone with a high-paying job who expects their income to decrease in retirement, getting an upfront tax break via a traditional IRA likely makes more sense.

Decide Where to Open Your IRA

You can open an IRA at most banks, credit unions and other financial institutions. However, IRAs are also available through online brokers, mutual fund providers and other investment companies. Each of these options has its respective benefits and downsides.

For those that open an IRA through an online brokerage, you may end up with better returns. In order to generate this growth, however, you’ll need to choose investments and manage your portfolio. Mutual funds are a popular type of investment, so you could open an IRA with a mutual fund provider too. Because these accounts can come with high minimums, it’s important to make sure you have enough to meet those requirements.

Choose Your Investment Wisley

After your IRA is all set up, the final piece of the puzzle is choosing your investments. More specifically, you’ll need to select from an array of mutual funds, bonds, stocks, exchange-traded funds (ETFs), and more. If you’re nearing retirement, contact the company with which you invested and speak with an advisor to analyze your situation.

For those that have never invested before, mutual funds and ETFs tend to be the easiest ways to go. A mutual fund typically holds a pool of assets, including stocks, bonds and money market funds. ETFs work similarly, only they tend to focus on specific risk tolerances and market sectors.

If you still need more information before making your decision to purchase an IRA contact us today!