When and Why Should You Open an IRA?
What is an IRA?
When it comes to saving for retirement, a lot of fancy terms get thrown around – IRA, 401K, mutual funds, stock portfolios, and so on. It can be hard to know which option is best for you and how these all differ.
An IRA is typically the next step to saving after your 401K. If your employer offers a program to match up to a certain amount in your 401K, max out that opportunity before moving on to an IRA. For example, your employer might match up to 3% of your annual salary in your 401K. Make sure you are saving at least 3% of your salary into your 401K, and then move on to an IRA.
An IRA is short for an Individual Retirement Arrangement. At POECU, we offer our members a traditional IRA, but other institutions may offer Roth IRAs.
A traditional IRA offers a tax deduction for the tax year that the contribution was made, and you will only be taxed on the money withdrawn in retirement.
What are the benefits of a traditional IRA?
Your contributions can be deducted from your taxable income. For example, at POECU, you can contribute up to $6,500 annually to your IRA. That means that you can have up to $6,500 of your annual income deducted from your taxable income. This can really help you out come tax season.
Your earnings are not taxed until they are withdrawn. With a Roth IRA, your earnings are taxed as they go into the account. While they aren’t taxed when you withdraw your money, you are missing out on years of compounding interest on the money that was taxed when you made the contribution. A traditional IRA is the opposite – you aren’t taxed on the money you deposit, but you are taxed on the money you withdraw. This means more money sitting in your account to compound interest.
It forms a nest egg for your retirement. A traditional IRA should not be your only form of saving for retirement, but it forms a tax-free nest egg to supplement your retirement savings. Since it is an out of sight, out of mind type of account (you will be penalized by the IRS for withdrawing your money early), your money will continue to grow for you.
When should you open an IRA?
As soon as possible! The earlier your start saving, the longer your money can compound interest on itself.
Starting at 21 and starting at 25 can be the difference of tens of thousands of dollars. And remember, there is no minimum amount that you have to save each year. Even if you can’t afford to save the maximum amount allowed, you should still save what you can and get the ball rolling for your retirement.
Where can you open an IRA?
Almost every financial institution offers traditional or Roth IRAs.
At POECU, we offer our members a traditional IRA to help you save for retirement. Opening an IRA isn’t difficult, and your future self will thank you.
Our members can call our main branch at (504) 885-6871 and ask for Kellie, our IRA specialist, to open an IRA. She can answer any questions that you have and get you started towards a secure and bright retirement.
Remember that it is never too late to begin saving!