Which IRA is right for me? Well an IRA is an individual retirement account and it is a means that most people have available to them. There are two types of retirement accounts available for most people. One is called an employer-sponsored account and you may have access to one of these. Examples of these would be 401k, 503b, or 457 accounts. They are named these odd numbers as that is the tax code that governs their use and rules. Then there is the IRA which allows people that work for smaller companies to invest in their retirement. Let’s cover what an IRA is and what IRA is right for you.
These ideas are based on my personal experience and opinion and should not be considered professional financial investment advice. Furthermore, the ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
Table of Contents
When it comes to retirement planning, an IRA (Individual Retirement Account) can be a great way to save for your future. But with so many different types available, it can be difficult to know which IRA is right for you. To help you make the best decision, here’s a quick overview of some of the most common IRA options and their features.
Traditional IRA Benefits
This is what most people talk about when they mention the word IRA. A Traditional IRA is a pre-tax account that you can put money into every paycheck, once a month, or sporadically throughout the year. Some people may deposit their tax refund into an IRA account as they lived without that money for the rest of the year.
If you have direct deposit you can allocate a portion of your check to deposit into a brokerage account you would need to set up. Vanguard or Fidelity are the most common places to set up one of these accounts. You would go to their website and create an account. With that account information, you can set up direct deposits into your account.
I would recommend doing a setup where you put in a specific dollar amount first to your IRA. Then another specific dollar amount goes into your savings account. Finally, put the rest into your checking account to live on. If you have access to a 401k or other employer retirement account that provides a company match you will want to at least contribute that much to get free money from your employer.
Following this pattern will guarantee that you can automatically put money away for retirement and into your savings. This one thing is seriously what changed my relationship with money. By automatically putting some money into savings and retirement I was able to learn to live on what came into my checking account (after a while, I was able to dip into my savings account until I could adjust my spending habits).
Where Is Your Money?
Most people don’t know what they are invested in when they start a new job and open up a 401k.
Do you know exactly what the fund or funds you are investing in even are?
How much are you spending on fees?
What if there was a way to invest in the biggest companies in the world easily and with fees less than 0.1%?
Roth IRA Benefits
The Roth IRS offers a variety of benefits, such as tax advantages and flexibility in withdrawals. Contributions to the account are made after taxes have been paid, so when it comes time for retirement, withdrawals are not taxed. This allows retirees to maximize their income potential and stretch their retirement funds further.
In addition to tax advantages, Roth IRAs also offer more flexibility in terms of withdrawal rules than other types of IRAs. Withdrawals can be taken at any age without penalty or taxes for qualified reasons. This makes them ideal for long-term savings goals requiring access to funds before retirement, such as buying a home or rental properties.
This means that if you put your money in a Roth IRA you can withdraw the money you put in without taxes. If you take out the earnings before 59 1/2 you will pay federal taxes on that money. If you try to take any money out of a Traditional IRA or employer-sponsored retirement account like a 401k you would pay taxes on any of the money withdrawn out of those accounts.
If you are deciding between a Traditional vs a Roth IRA account and you are eligible for both then you need to ask yourself one question: Do you think taxes will be higher or about the same (or lower) when you retire? If you believe they will be higher when you retire and you can afford it you may want to think about a Roth IRA instead.
Here are some questions that can help you:
Do you want to have the option to remove your money without penalty and use an IRA like a bank account that can make you 10%+ returns over the long term (S&P 500 over any 20-year period has returned 10% or more)? Invest in a Roth IRA – this is the biggest reason to do a Roth IRA in my opinion.
Do you want to hold the investment until after 59 1/2 and then start to take the money out? Invest in a Traditional IRA.
Do you think that taxes on what you will live on after retirement will be much higher than today? If so, then invest in a Roth IRA.
Do you want the tax break today? Invest in a Traditional IRA.
Join my free Facebook group to get a ton of free resources to help you get out of debt, learn how to invest your money, and work toward having the option of retiring early.
Your investment options for an IRA are much more expansive than with an employer-sponsored account because your employer chooses most of your options. With an IRA you open up yourself you should have access to many more options. I personally use index funds that allow me to diversify my stock portfolio with low fees. If you want to know more about these go to my article on what is a crash proof retirement here.
In 2023 if you are under 50 years old you can invest up to $6,500 a year.
If you are 50 or older you can invest up to $7,500 a year.
These limits are why I suggest you invest in these funds automatically per paycheck.
- Single: MAGI less than $129,000 for a full contribution or $129,000 – $144,000 for a partial contribution.
- Married filing jointly: MAGI less than $204,000 for a full contribution or $204,000 – $214,000 for a partial contribution.
- Single: MAGI less than $138,000 for a full contribution or $138,000 – $153,000 for a partial contribution.
- Married filing jointly: MAGI less than $218,000 for a full contribution or $218,000 – $228,000 for a partial contribution.
Note these numbers are based on your Modified Adjusted Gross Income (MAGI), which for most people is just your gross income. MAGI wouldn’t include supplemental social security payments for example. Your gross income what you make before taxes, healthcare, retirement, etc. is taken out of your paycheck.
Wow, you read a lot to get here. Can you do me a favor, please? Can you leave a comment if this was helpful to you or if I missed something? Alternatively, it would help me out a lot if you shared this content with those that might need to see it. Thanks, you are the best!
Which IRA is right for me?
We have covered quite a bit here but for most of you it all depends on two questions:
1) Are you eligible for Traditional and/or Roth IRAs? If you are ineligible because you make too much money then maximize your employer-sponsored account (401k / 403b / 457 / etc.). If you have already done that or don’t have that option look into being your own bank. INSERT LINK
2) Can you afford to maximize your IRA?
If you are eligible for both types of IRAs and can afford to fully fund either type then ask yourself if you need the money before you are 59 1/2. If the answer is yes, then invest in a Roth IRA. Otherwise invest in a Traditional IRA.
5 steps to Prosperity
5 Steps to Prosperity
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If you are only eligible to invest in a Roth IRA then invest in this order:
1) Get your company 401k match as that is free money.
2) Build up an emergency fund of at least $1,000.
3) Pay off high-interest debt.
4) Fully fund your Roth IRA.
5) Pay off lower-interest debt (where it makes sense).
6) Maximize your 401k plan.
7) Look into being your own bank or investing in other index funds by using a program like Robinhood.
8) Pay off your home/purchase other assets.
About Dwight Scull
I have been married to my wonderful wife, Rebecca, who puts up with me since 1999. I am a proud father to my Gen Z, son, and daughter-in-law. Grandfather to my favorite granddaughter who was born in 2021.
I lost my mom, father-in-law, and 12 others in 2013 and was DEEPLY in debt. I started reading and watching all the financial info I could find.
I chipped away at my debt and went from a negative $105k net worth having one home paid off, no credit card debt, and saving/investing 45%+ of my gross salary.
I used these daily habits to lose 100 pounds and keep it off.
I believe that you can overcome any challenge you face if you just take small daily actions and be consistent with them. It is how you will be financially successful.
Join my free Facebook group to get a ton of free resources to help you get out of debt, learn how to invest your money and work toward having the option of retiring early.