Retirement: with any luck, we reach it with enough money to allow us to live a relaxed seniorhood until the end of our lives. Unfortunately, an overall lack of job stability and financial literacy means many young people aren’t planning for retirement as thoroughly as they once did. Those who work may assume that as long as they maintain a savings account, they’ll be okay. Unfortunately, nothing could be further from the truth.
While having a savings of between $20,000 and $50,000 is ideal for people of any age, it isn’t always reasonable to achieve and it certainly isn’t enough to get you through retirement. Likewise, investment portfolios can fail and whole life insurance policies may lose value over time. So what exactly can you do to protect your finances and grow your money? IRA accounts just might be the ticket to financial freedom.
What Is an IRA?
IRA stands for “Individual Retirement Account.” Just as the name suggests, it is an investment product that lets you save and grow your money throughout your life for eventual retirement. IRA accounts give Americans special tax breaks that greatly increase your money-making potential, even if you’re only investing a small amount of money each year. Unlike other stocks and investment products, IRAs are protected from heavy taxes, and in some cases, may be more stable in a quickly changing market.
How to Open Your IRA Account
Opening an IRA account is remarkably easy. As long as you’re an American citizen with a taxable income, you have the right to open an IRA to help you save. You can open an IRA account with nearly any bank, credit union, or investment broker in America; each takes a slightly different approach to the IRA as a whole. From there, you fund your IRA with stocks, mutual funds, and bond investments in whatever way you see fit. Because the money isn’t taxable, you spend less on taxes and more on building your wealth.
Why IRAs Aren’t Taxed
As mentioned above, the money you generate or invest into an IRA isn’t taxed. That’s because IRAs fall under tax-deferred growth. If you invest $10,000 out of your yearly salary each year, you only pay taxes on what you didn’t invest in the IRA. Once the money is invested in the IRA, taxes are deferred and remain deferred until you begin to draw money from it later in life. Once you begin to take money out of the account, you pay taxes on it again as if it were income.
Here’s an example:
- You make $100,000 per year
- You invest $10,000 per year in an IRA
- You only pay taxes on $90,000 per year
This is a distinct benefit for people making anything from $20,000 to $2,000,000 a year or more. It can effectively reduce your taxes so much that you increase your monthly income and save for retirement at the same time.
Finally, holding an IRA gives you an excellent reason to invest more money into your financial security, ensuring that you don’t reach the end of your life without the money needed to rest, relax, and enjoy yourself. It’s the perfect balance between savings on taxes now and having what you need later on.