Saving for your retirement can be a daunting task. Figuring out what account option is best for you, choosing investments, and understanding the taxes you will have to pay may seem too complicated, but starting your investments early means a big payoff in the future. Thankfully, retirement investing is easier than you think. It can be confusing comparing a traditional vs roth IRA. To help you get started, here are some important things to know when saving for your retirement.
Traditional or Roth IRA
Saving for retirement isn’t as simple as shoving your cash in a bank account and forgetting about it. Bank savings accounts generally have very low interest rates, meaning you’ll miss out on the chance to multiply your money. Instead, you should consider investment accounts specifically designed for retirement. Your employer-sponsored 401K is a good place to start, but if you want to really take control of your future, a Traditional or Roth IRA might be perfect for you. So what’s the difference between the two? And which one should you choose? It comes down to taxes.
Traditional IRA Account
With a Traditional IRA, you don’t have to pay taxes on your contributions until you start withdrawing money at the age of 59 1/2. This means you get the yearly advantage of deducting your Traditional IRA contributions from your taxes (assuming you fall within the government’s income limits and other guidelines).
There is a downside to Traditional IRAs, though. When you start withdrawing money during retirement, you have to start paying taxes. This may not be a bad thing, especially if those yearly tax deductions were particularly helpful. But if you find yourself in a higher tax bracket after your career, you will also find yourself paying higher taxes on those withdrawals. With that in mind, here’s an overview of another option: A Roth IRA.
Roth IRA Account
Roth IRA’s are funded with after-tax dollars. This means you can’t deduct your contributions from your taxes, but it also means you won’t pay any taxes on withdrawals. This is great if you’re in a higher tax bracket when you retire than while you’re working. It’s also great if you’re not planning on contributing much during your career, making any tax deductions from a Traditional IRA less valuable.
While IRAs are some of the most popular and versatile retirement account options, it’s important to look into all possibilities. Many companies give free retirement consultations, so don’t be afraid to take advantage of their resources so you can make an informed decision.
Time to invest
Ok. You’ve picked an account. Now it’s time to start investing. That’s right, simply putting your money in an IRA doesn’t do anything more than transfer money from your bank to your investment account. You have to actually choose investments if you want to get the advantage of compound interest. Some of the most popular and effective investment options are mutual funds. This option lets you invest in a portfolio of companies chosen by experts. Some are actively managed, while others aren’t. Choosing between the two comes down to how long you’re planning on investing and how much active management will cost.
Here are two things to keep in mind when choosing a mutual fund:
- Cost: Funds like the Vanguard 500 Index Fund (VFIAX) have an “expense ratio.” This number is the percentage of your total stock value that will be charged every year to cover the cost of running the fund. If the ratio is 1% and you own $100 in stock, you will pay $1 yearly. Generally, a good expense ratio for an actively managed fund is between 0.5 and 0.75%.
- Management: Actively managed funds generally aim to outperform their market category. In contrast, index funds just try to match it. Both can be helpful, but index funds tend to perform better over long periods of time, making them a good choice for retirement accounts.
Proceed with an IRA Account
Start Investing Now
With this information in mind, the most important thing to remember is to start investing now. The stock market goes up and down and investing early means you can ride the waves while still earning money. And thanks to compound interest, investing when you’re young gives you the possibility to retire with millions in the bank! So get out there and start saving! read full article traditional vs roth ira.