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What is an IRA?
To have oneIRA (Individual Retirement Account/Plan)is one of the most common ways for young adults to start investing! This is probably because these accounts allow itgood return on your moneyand has many advantages.
Before we start, you should know that there aretwo types of IRA options: traditional IRA and a Roth IRA.
The Roth IRA is the newer version and highly recommended by many over the traditional Roth account.
However, we encourage thisweigh the pros and consThese can be found below to get a good idea of what is best for your financial future! Be sure to check out our other articles on this investment method to better understand whether it is a good fit for your portfolio!
What is the difference between Traditional and Roth IRA?
When it comes to investing as a young adult, it's important to assess and choose the best type of IRA for your situation!
1. Traditional IRA: You invest your money before taxes.
This means that when it comes to the money you earn,you invest itFortaxes are deducted from this.
It may look good on paper, but the downside is that it will be taxed when you withdraw the money after retirement. If your account grows significantly during your lifetime, you will be taxed much more later because it is considered taxable income when you withdraw.
2. Roth IRA: You invest tax deferred
The easiest way to imagine this is in terms of the money you get in your pocketalreadytaxes are deducted from this.
Of course you don't have to invest as much up front, but the great thing about this is that you don't have to pay tax on it later! Know that you must have money in an account for more than 5 years to be tax-free upon withdrawal.
What are the requirements for having an IRA?
There are no income requirements to enroll in a traditional IRA. However, to get a Roth IRA, you must have a job (earning taxable income) to get an account.
Income requirements:
If you are single, you should earn less than$135,000/yearto contribute to an IRA.
If you are married, you should earn less than$199,000/yearjoint contributions to an IRA.
How much can I invest in an IRA?
You can invest up to $5,500 per year in an IRA account, as long as you are under age 50. This is approximately $458/month over the course of a year. If you are over 50, you can put in $6,500 per month. year!
How old do I have to be to get an IRA?
Simply put, enrolling in an IRA depends on your age. For a traditional IRA yyou should beyounger than 70.5 years. To open a Roth IRA, anyone can open an account, as long as you earn taxable income!
With respect to the Traditional IRA, the age limit is due to the mandatory requirement to withdraw at this time.
For the Roth IRA, you can start an account for your child early. For example, if you make money working at a restaurant at age 16, you can open a Roth IRA and get a huge head start on your retirement accounts!
When Can You Withdraw From an IRA?
To withdraw money from a traditional IRA, there is a required withdrawal period when you reach age 70.5. To withdraw from a Roth IRA, there is no official date for a mandatory withdrawal.
How Do I Start a Traditional or Roth IRA?
To start an IRA, you can go to your local bank, a brokerage firm, or an online company to apply for an account. My IRA runs through Fidelity online. You can open an account in a day and start investing within days!
Bank: There will be limited investment opportunities in a bank. If you are not a fan of CDs and money markets, this may not be a good option to use.
Brokerage: This may incur more costs than if you create an account yourself. Be careful about paying too much! You may want to look for brokers that offer free Roth IRAs, for example, to save money. The advantage of this is that you know that you are hiring a professional to handle your accounting.
Online business:You can start an account with a company like Fidelity if you want more control and convenience with your account!
When can I contribute to an IRA?
Basically, you can contribute to an IRA at any time. For both traditional and Roth IRAs, it is common to make monthly or biweekly withdrawals.
Remember that everyone's situation is different!You can contribute up until tax day(15 april), then it will be considered "next year"!
The time frame on which IRAs run runs until April 15 instead of December 31st.
Okay, let's recap!
- There are a fewmajor differences between traditional and Roth IRA accounts, and you should be trained in both before you decide to invest.
- The biggest difference between the two IRA options has to do with where your money comes from:income before or after tax.
Do you want to have an IRA account?It's a great way to start investing and there are many benefits!Remember to do thorough research before officially investing!
Don't miss learning more!
- How to Achieve Financial Freedom with the 70/20/10 Budgeting Rule!
- The Beginner's Guide to Better Understanding Passive and Active Income
- 7 Surprisingly Easy Ways to Earn $50 a Day!
