How IRAs Can Maximise Your Retirement Savings

By Spencer Hulse Spencer Hulse has been verified by Muck Rack's editorial team
Published on October 24, 2023

Want to enjoy your retirement without worrying about your finances? Now is a wonderful moment to start learning how to set up an IRA if you’ve been putting it off. Similar to employer retirement plans like 401(k)s, IRAs provide a different method to save for retirement.

Additionally, just like 401(k)s, IRAs offer tax benefits to investors. If used correctly, the Roth form of an IRA allows for tax-free withdrawals in retirement. Read on for answers to all the IRA questions you probably have but were perhaps too hesitant to ask. 

What Is An IRA Account?

A form of investing account called an IRA is designed to assist regular individuals in saving money for retirement. They often come in two types. Because traditional IRAs are established with pre-tax funds, any contributions you make to them during a given year can be deducted from your taxable income. You won’t pay taxes upfront, so when you take the money in retirement, you’ll have to pay them. Any money withdrawn from the account before the age of 60 will also incur a 10% penalty.

Due to the fact that they are financed with money that has already been taxed, Roth IRAs do not give an upfront deduction. If you’ve had the account for at least five years and are at least 59 and a half years old, you can withdraw all of your funds, including investment profits, tax-free. Furthermore, there are no penalties associated with withdrawing any of the money you have contributed.

What Distinguishes An IRA from a 401(K) Plan?

Perhaps you’ve noticed that IRAs sound a lot like 401(k)s, which also provide standard and (at certain employers) Roth alternatives. There are a few significant variations. For starters, a 401(k) is managed by your company, but an IRA is an account you create for yourself at a brokerage house. This implies that when selecting a portfolio inside your business’s plan, you’ll probably be given a menu of mutual funds that have been approved by the company.

The limitations do not apply to IRA investors. Almost everything your brokerage offers is available for investment, including stocks, bonds, mutual funds, exchange-traded funds, and even cryptocurrencies.  

Different rules apply to the amount you can give. Employees can make 401(k) contributions of up to $22,500 in 2023, with an additional $7,500 if they are 50 years of age or older.

In 2023, you may make IRA contributions of up to $6,500 ($7,500 if you’re 50 or older), while Roth IRA contributions are subject to income restrictions. You are eligible to make the maximum contribution if your combined income as a married couple or single filer is less than $218,000 or $138,000. Higher-earning individuals are eligible for lower or no contributions.

What Is Preferable? A Traditional or Roth IRA Account?

In general, it is believed that a Roth is preferable if you anticipate an increase in your tax rate. That’s a good bet if you’re just starting out in your profession because you’ll (hopefully) be able to command a greater and better salary as you advance. By paying taxes on your Roth money now, you can prevent having to pay more in taxes later in life.

It can make more sense to pay later via a regular IRA if you believe your taxes will be lower in the future. Additionally, you receive a tax advantage up front, which may allow you to invest additional money right now.

Tips to Increase Your IRA Investments

1. Invest Your Money Instead of Only Funding Your IRA

A common error made by retirement investors is to deposit money into an IRA or other tax-advantaged account — often motivated by a deadline in mid-April — but fail to strategically invest the money. In the worst-case scenario, investments generate cents a year for every $100 invested while sitting idle in a money market account.

Avoid the error of leaving your money unutilized. IRA contributions should be invested actively in a suitable vehicle, such as a target-date mutual fund, bond funds, or a selection of properly picked individual equities. You may be able to earn more returns from any of them than from a straightforward money market fund. Just bear in mind that the professionals advise investing in low-cost index funds for retirement, positioning you for the best returns and lowest expenses.

You can invest your money in any investment vehicle to secure your retirement. No matter if you’re a novice trader, an expert, or a crypto fanatic, you’ll get access to the world’s crypto markets and take advantage of some of the lowest costs in the industry. There are also tools like BTC iplex that make it simple to sell, purchase, and monitor their fluctuating prices.

2. Select the Proper Type of IRA

You may be aware of the differences between regular and Roth IRAs, including their main features. Standard IRAs exempt you from paying taxes now but require you to do so in the future, while Roth IRAs require you to pay taxes now in order to benefit from tax-free withdrawals in the future. Which one should you pick? If you anticipate being in a higher tax rate in retirement, go for a Roth; alternatively, take advantage of the tax cut now.

3. Purchase Bonds in an IRA and Stocks in Your Traditional Account

This advice is for the tax geeks, albeit everyone ought to be one. Consider purchasing bonds in your IRA and stocks in your normal account if you are fortunate enough to maximize your tax-advantaged retirement account contributions and have money left over that you save in conventional investing accounts.

Bond payouts are subject to ordinary income tax, but equities and mutual funds that invest in stocks frequently experience capital gains. These aren’t the normal dividends you get from your stocks; rather, they’re the yearly rise in price.

4. Take Risk

Every few decades, it seems, there is a stark warning that there are no assurances when investing. People can lose money and do. There is no such thing as a straight return. Those who overlook this fact ultimately suffer harm, often very serious harm. However, investing for the long term has historically produced profitable results.

How Do You Start a Roth IRA?

The process for starting an IRA is similar to that of opening any other form of account and is available virtually on every major online brokerage. Once you’ve logged in, you’ll need to complete an application, for which you’ll need to present some personal financial information as well as a form of identification like a passport or a driver’s license. After that, you must decide how to fill your account — by connecting a bank account, starting a wire transfer, writing a cheque, or moving money from another kind of account, for example.

As soon as funds are deposited into your account, they are immediately rolled into a “sweep account,” which is a low-interest cash reserve by default. You can utilize that sum of money to buy and sell investments for your IRA. While you practically have the whole investable world at your disposal, you should lean towards diversified, inexpensive mutual funds or exchange-traded funds (ETFs) that you intend to keep for a while. If you decide to change funds after making your initial deposit, don’t worry; IRA accounts sales of investments are exempt from capital gains tax.

The Bottom Line 

Tax-advantaged retirement savings accounts are known as IRAs. They function somewhat similarly to a 401(k), but an employer is not required to sponsor them. Traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs are among the several forms of IRAs. There is a cap on how much tax you may save by investing in an IRA since there are yearly income restrictions on contributions to regular IRAs and Roth IRAs.

By Spencer Hulse Spencer Hulse has been verified by Muck Rack's editorial team

Spencer Hulse is the Editorial Director at Grit Daily. He is responsible for overseeing other editors and writers, day-to-day operations, and covering breaking news.

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