When to (and Why) Start an IRA

by Ryan Yates

It's time to think about the future.

I know what you’re thinking . . . “An IRA? Isn’t that some sort of investment? I thought this was a debt-reduction blog.”

Well, you’re right on both fronts. Spending wisely and preparing for your financial future have a huge roll in the Deliver Away Debt universe.

Starting an IRA now can mean mucho dinero when you’re older.

Think of it like this, saving and investing for your retirement can help you achieve your financial goals and help you avoid future debt (like living off credit cards when you’re 75).

IRA Basics

IRA stands for Individual Retirement Account. Unlike a 401k, your employer won’t match funds deposited into your IRA. It’s all on you.

After that, an IRA is basically a long term tax-sheltered savings account in which you deposit money and promise to keep your hands out of the cookie jar until you retire (or there are a few tax penalties and fees).

There are two types of IRAs, there’s the Roth IRA and the Traditional IRA. And you get to choose how your tax savings look depending on which account fits your lifestyle best.

Traditional IRA – Deposited funds made to your Traditional IRA throughout the year are tax deductible. This is your tax break with a Traditional IRA. Once you begin taking withdrawals from this account, your money will be taxed.

Penalty-free withdrawals begin at age 59 1/2 and are mandatory by 70 1/2. Any withdrawals made before 59 1/2 are subject to a 10% penalty.

Roth IRA – Deposited funds made throughout the fiscal year are not tax deductible, but any and all withdrawals made are 100% tax free. And because you’ve already paid taxes on the deposited funds, you don’t pay penalties for early withdrawals.

Both types of IRAs can be a mix of individual stocks, bonds, mutual funds, ETFs, certificates of deposits, etc. An IRA is the tax-sheltered account which holds the investment type that you choose.

It’s basically a question of whether you want to pay taxes on your money before you make deposits into an IRA or when you make withdrawals.

Get to the “Why” Already

An IRA is an awesome financial tool to have in your arsenal. It’s an efficient and easy-to-use way to put back a little money each month and watch it grow.

Individual Retirement Accounts will help you be prepared and stay prepared for that time in your life when you remove yourself from the workforce. Think of it like future financial security.

Instead of facing retirement with questions about income and uncertainty about living expenses, an IRA will help secure your financial foundation when you say goodbye to your regular salary.

Another great reason to open an IRA account (whether Roth or Traditional) is that the tax benefits are too great to pass up. Whether you want to enjoy the tax incentives now or later, setting up an IRA will help you do more with your money by keeping more of it away from the tax man.

You’re also not restricted to certain types of investments. When you set up your IRA, you have the freedom to choose whatever investment option fits you best.

When to Start

Now! Ok, that may be a little overzealous, but many financial experts will tell you the best time to open an IRA was yesterday.

Personally, I would make sure to pay off my credit card debt and save at least $1000 for an emergency fund before I started making deposits into an IRA.

Dave Ramsey’s famed Seven Baby Steps suggests that you save $1000 for emergencies, pay off all debt besides your house, and save up three to six months of living expenses before you invest in an IRA.

Whatever advice you choose to follow, remember that any retirement planning will have a much better chance of success when a sound strategy is being followed.

Don’t worry if you aren’t in the position to deposit thousands of dollars into an IRA. Many financial institutions offer low introductory minimums (some as low as $50). Thank you consumer competition.

Good luck and happy IRA hunting.

Photo By RambergMediaImages

{ 1 comment }

Nick December 15, 2011 at

I’m not completely sold on waiting until you’re completely debt free plus a fully-funded emergency fund before you invest in an IRA unless you’re really committed to getting out of debt. If you do, and it’s a year or so delay, fine. But if you’re not going to kick it into high gear and you end up delaying 5 years or more, you might be better off getting into the habit of putting some money away – maybe splitting between paying down debt and investing with the plan to add the debt payment amount to your investment amount when you’re debt free.

{ 6 trackbacks }

Previous post:

Next post: