Money Made Simple: Individual Retirement Accounts (IRAs)
IRAs, or Individual Retirement Accounts, are a way for individuals to save and invest money for retirement and receive tax benefits. If you are under the age of 50, you can contribute $5500/year and if you are over 50, $6500/year.
A traditional IRA allows you to put pretax dollars into an investment account. This is a great way to save on taxes now but you will be taxed on withdrawals and gains in retirement. This is usually the better choice if you are in a higher tax bracket now and expect to be in a lower tax bracket in retirement. There are penalties for withdrawing your money before retirement at age 59.5. The penalty is 10% but there are some exceptions depending on what you use the money for (buying a house/college tuition).
A Roth IRA allows you to put post tax dollars in an investment account (same $5500/6500 limits). The withdrawals and earnings are not taxed and there are no penalties for withdrawing early. This is usually the better option if you are already in a lower tax bracket, want to save for retirement but anticipate needing the money sooner, or don't want to pay taxes in the future.
An IRA can typically be opened at any bank with an investment platform with no minimum contribution. Some will even give you a cash bonus for opening one. I keep mine at Capital One 360 Sharebuilder and will get a $50 bonus for contributing at least $5000. Since this is a retirement account, you don't want to be playing around with risky individual stocks. You should invest in the market for slow,steady, safe growth. Look into a mutual fund, index fund, or ETF that tracks the entire market. Buy your shares and leave it to grow. Don't be involved in the regular ups and downs in the market and don't withdraw just because things seem really high or really low. The market will crawl steadily upwards with minor setbacks for decades until retirement.
Here's an article showing how money grows over time and why now is the best time to invest. One person puts away $5000/year for 11 years starting at age 25. Her total contribution is $55,000 but she ends up with $615,000 at age 60. Another person puts away $5000/year for 26 years starting at age 35. She contributes $130,000 but only ends up with $430,000. This proves that time is the most important factor when investing, not contribution! Read more.
