Updated: Jan 16, 2019
WHAT DOES IT LOOK LIKE TO YOU? A Cialis commercial? Working out in the middle of the day? A margarita in Mexico? Not setting an alarm? Umm just NOT working in general?
So what sucks about retirement? We have to start thinking about it NOW. In our 20's? When I got saddled with a $90 per person birthday dinner last weekend nah... Unfortunately yes and it all starts with the IRA.
IRA’s… Can they please come up with better names?
An IRA is an Individual Retirement Account which doesn’t sound nearly as bad as an IRA… Not sure what it is that bothers me so much, maybe because it’s so close to sounding like IRS?
Whatever, I’m gonna refer to it as a retirement account for now because it sounds less scary.
There are a couple of different kinds so let’s just start with the most basic being the traditional retirement account.
By definition it’s a tax-deferred investment account that enables individuals to put income aside for retirement.
Okay I’m already getting kind of tired of typing out retirement account so I guess I understand the abbreviation a little bit more now…
Anyhow let’s break it down.
An investment account… Okay great but where? With who? Do I set it up? Does my employer set it up?
An IRA (sorry I had to) is NOT like a 401k, you set-up this account yourself with a financial institution aka a bank, an insurance company, etc. I use Fidelity and it was very quick and painless. You can literally google “setup an IRA Fidelity”, choose open a traditional IRA, and follow the steps. There’s always customer service reps on the phone and on chat to help you if you have questions blah blah.
Okay so once you’ve got one setup…. Now what? How do I contribute to it?
You can schedule automatic payments to your IRA with your financial institution where you setup the account. Typically, you dictate the amount you want contributed or choose to maximize your annual contribution.
Currently, the maximum amount (pre-50) you can contribute to your retirement account ANNUALLY is $5,500.
That’s about $458 per month. Yep- seems like a pretty big chunk of change BUT at least start somewhere. Begin with $100 a month of automatic payments and I guarantee you will hardly notice (okay you might notice… but baby steps)- then go from there. It’s not fun but what’s more important being able to retire or trolling Sephora every lunch break (okay maybe bad example)?
Okay so tax-deferred??
One of the biggest advantages of contributing to your IRA (besides the whole getting to retire with financial freedom part) are the tax advantages. Usually interest and dividends on your investment accounts are taxed every year so you defer or postpone these taxes until you withdrawal.
So I’m like still gonna have to pay the taxes?
Well technically yes BUT because you aren’t having to pay these taxes now it allows all that extra income to compound each year without the taxes taking your hard earned dollars!! So all you need to now is compounded money = more $$$$.
Once you turn 59.5 (yes- why the half I don’t know) you can withdrawal money penalty free and pay income tax for the tax bracket you fall under the year of withdrawal. The key here is that you will be retired (bc of all your hard earned money being invested and saved properly hehe) and your tax bracket should be significantly lower at that point (more on that later).
Now before we get into all that mess keep reading and then come back to Traditional vs. Roth IRA for comparing all that tax advantage goodness.
Another bonus is a tax deduction at the end of the year so less taxes = more money = yayaya
Okay so if you read my 401k post (if not do yourself the pleasure) you are probably thinking this? That? Or both?
Luckily you CAN have BOTH a 401k and an IRA. If you are not wanting to part with so much of your paycheck, then the 401k is your best option ESPECIALLY if your employer is matching your contributions in anyway. It offers a higher annual maximum contribution and better tax benefits.
ANY kind of saving for retirement is the good kind (wow I even feel lame rereading that)
If your employer has a 401k plan and you want to maximize one kind of retirement account, then that’s the way to go
If your employer DOESN’T offer a 401k plan then an IRA is still a great option for retirement savings
If you leave your job, and your current job doesn’t offer a 401k plan then you can roll that over into an IRA
BUT there’s more... *large exhale * I know it’s never ending…
That takes us to a Traditional IRA vs. the ROTH IRA (another fun name!!) that has different kinds of tax benefits. If you want to keep reading or take a break (I understand), let’s figure out if you want to put your money into a Traditional IRA or ROTH IRA in another post.