You probably understand that saving for retirement is important, but you might not know exactly how to get started. Whether you’re able to participate in an employer-sponsored plan or not, contributing to an individual retirement account (IRA) can be a great way to prepare yourself for the future. Check out our beginner’s guide to getting started with an IRA.
1. Choose the Right Kind of IRA
It’s best to think carefully before you open an IRA because your decision will affect your savings and your tax bill. There are four main types of IRAs to choose from and each one has its own set of benefits. Traditional IRAs offer the opportunity to claim tax deductions since they’re funded with pre-tax dollars. The funds grow tax-deferred, which means that you’ll only pay income tax when you start taking withdrawals at age 59.5.
If you fall under the income limits set by the IRS, you have the option of opening a Roth IRA account. You can only save after-tax dollars in a Roth fund. You won’t have to pay any taxes on your withdrawals and you can take them without penalty at any age.
Another alternative to the traditional IRA is the SEP-IRA, which is ideal for small business owners and independent contractors. There’s also the SIMPLE IRA. That’s a retirement plan that owners of small businesses can set up for their employees and contribute to on their behalf.
When you’re ready to open your account, be prepared to submit some personal information and choose beneficiaries. You can start an IRA at a bank or contact a broker, a mutual fund company or a representative from an automated investing company.
Related Article: Which Type of IRA is Right For You?
2. Make Room in Your Budget for Savings
Once you open your IRA, you can identify where your savings will come from. Reviewing your budget and your savings strategies will show you whether you need to move some money around or cut your spending in certain areas. You can make direct contributions to your retirement account or roll over an old employer-sponsored account. If you choose to roll over one of your plans, it’s a good idea to aim for a direct rollover so you don’t have to pay additional taxes or get hit with a penalty.
3. Fund Your IRA
After you’ve decided that you want to make saving a priority, you’ll need to think about how much you want to invest. The size of your contributions will depend on the amount you need to save in order to live comfortably once you stop working. But keep in mind that there are contribution limits. For 2023, you can contribute up to $6,500 ($7,500 if you’re 50 and older).
In 2023, maximum contributions to SEP-IRAs cannot exceed the lesser of 25% of your compensation or $66,000, up from $61,000 in 2022. If you have a SIMPLE IRA, you can contribute up to 15,500 in 2023, up from $14,000 in 2022.
Opening an IRA isn’t as intimidating as you might think it is. It’s an important step toward a secure future and it can help you build some serious wealth if you take the time to learn and follow best practices. Remember, the sooner you start saving, the better.
Tips for Investing
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s investment calculator to see how your money could grow over the years.
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