As you enter the prime stages of your life, the notion of retiring seemed not so distant anymore. Thinking about it can be quite overwhelming and scary because there seems to be a lot of things (and money!) that needs to be considered. Dreading retirement will not make it go away; the key is to plan early and achieve the retirement life of your dreams.
Before anything else, here is the ugly truth: money is everything. Even in retirement plans, the financial aspect plays a huge role in determining the course of your entire retirement life. Almost everything in life—including health, necessities, and recreational activities—involves money. We had a hard time providing for these things when we were working, how much more during our retirement.
Living a happy retirement seems impossible without huge chunks of dollars in your bank account. Most retirees, or those nearing it, are concerned about their future financial situation which you can read more about here. They fear for their monetary capabilities when inevitable circumstances happen such as economic recessions or a serious health problem.
Aside from working tirelessly to increase your contributions, there are other ways to grow and boost your nest egg. One such method is through an IRA account.
What is an IRA?
IRA or individual retirement account is a tax-advantaged investment account that can fund your retirement savings. The account acts as a holder of the various assets and financial products you wish to invest in such as stocks, mutual funds, government bonds, ETFs, and even gold.
An individual’s employment status serves as the primary basis of the type of individual retirement account they can open. There are several types of self-directed retirement accounts, but the de facto standards are the traditional and Roth IRA. The SIMPLE and SEP IRAs are for small business owners and self-employed individuals.
How to get an IRA account??
You can easily learn how to get an account on several financial institutions like banks, brokerage firms, insurance, and mutual fund companies. They will assess your eligibility based on your current earned income excluding investment income, child support, or social security benefits. Although it is tax-deferred, tax consequences can still haunt you if you withdraw it before the age of 60.
What are the basic types of IRA?
As the name implies, the traditional IRA is the go-to account of most people due to its numerous tax advantages. For one, the contributions you will make can either be partially or fully deductible depending on your work-retirement plan (if there is any) and current income. There is a tax deduction of up to $6,000 and an extra thousand-dollar if you are 50 years of age and above. You can withdraw your funds during your actual retirement year (600) to reduce your tax liability.
There is also no income specification to be an eligible traditional IRA holder. Everyone can apply, but it cannot grant the same tax deduction for every individual.
The Roth individual retirement account provides a good taxation balance than its traditional counterpart. In this type of IRA, your contributions are not tax-deferred, however, it allows you to grow your funds and withdraw it anytime without tax and penalty fees. Its specifications are also more lenient as it has no required minimum distribution, no age limit, and no employer-plan restrictions.
- Simplified employee pension
The SEP is an IRA account made and funded by your employer, who also gets taxation benefits for this sponsored retirement effort. SEP allows employers to grow your fund for you and make tax-deducted contributions. It is easier to set-up and has lesser annual contribution limits than other accounts.
To be eligible, employees must be 21 years of age, have worked for the employer for three of the last five years, and have earned a minimum of $600 during the current year.
- SIMPLE IRA
The SIMPLE or savings incentive match plan for employees is like a SEP account. However, it is primarily for self-employed and small business owners (with less than a hundred employees) that can contribute through salary deferral. According to this financial website (https://www.thebalance.com/what-is-a-simple-ira-2894167), participating in a SIMPLE account requires you to have the following qualifications.
- Employees must have earned at least $5,000 during their two-year employment and are set to receive the same amount this year.
- Employers are required to establish a fixed contribution of 2 percent or increase it up to 3 percent for every eligible employee’s payment.