July 17, 2012

Your Individual Retirement Account and the Benefits

Everyone is going to grow old, it’s inevitable, but not many think of this when they are young and on top of the world.  If everyone stopped to think about getting old, they would realize that their income will not always be what it was when they were thirty years old.  This would cause them to question how they plan to live when their only income is social security, if they’re lucky.  If you haven’t started saving for retirement, you still have time.  Ideally, a person should begin their IRA when they are young—the sooner the better.

Your IRA

IRA stands for Individual Retirement Account.  This is the best alternative to begin saving for retirement because it defers taxes on your savings until you retire.  This occurs because once you retire your savings are considered your income.  However, you will not be taxed on the lump sum you saved up, only what you withdraw during that year.  There are limits to how much you can save per year, for example, if you are under the age of fifty you cannot save more than $5,000.  This increases the older you get.  Two basic requirements for beginning to save for retirement with an IRA are to have taxable income and be under the age of 70.5.   Regardless of what IRA you sign up for (Roth, 401K, Traditional, SEP, etc.), check the rules and requirements for that specific plan.

An IRA can also be thought of as a forced savings account, because once you start saving you cannot touch that money.  However, there are some exceptions.  Traditionally, you will be penalized for early withdrawal with a 10 percent fee and you will be taxed for it as well.  If you are over the age of 59.5 you can take money out without facing any penalty.  But if you are under 59.5 years old, you can remove money without punishment if you are using it for: college expenses, medical bills, sudden disability and first-time home purchase.  There are limits to how much can be taken out early.  All of this helps ensure you retire with money and can live comfortably without having to rely on social security.

Job Changes and Your Retirement

In order for an IRA to be successful you must start as soon as possible because it needs time to grow.  The compound interest really begins to grow towards the end.  Another benefit of IRA’s is that you can rollover different IRAs.  If you have an IRA with your current employer and switch jobs, you can take your IRA with you to the new company and add it to the plan they have or move it to a company like Fidelity, Prudential, Vanguard, etc.

IRA’s are simple—you can have the money removed from your paycheck, it is automatic and stress free. Unlike having to manually split your paycheck and budget for it, IRA’s take the work out of saving for retirement.

Do you want to know more about debt and how you can make smart financial decisions now that will help you secure a more prosperous financial future? Sign up for our newsletter for monthly money tips.

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