Though 401(K) is gradually gaining its popularity, there situations that some employers don’t offer 401(K) to their employees. What can you do if you want to make investments and save for retirement?
Just open an IRA account!
What is IRA?
IRA, standing for Individual Retirement Account, is a tax-advantaged investing tool for individuals provided by many financial institutions. There are several types for IRA as of 2019: traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.
Who can have an IRA account?
Any individual who has taxable income and under the age of 70.5 can open an IRA account in financial institutes, for instance, banks.
Pay attention, you can only contribute earned income that meets IRA rules to your account, which does not include income from investments, child support, social security benefit, for example.
How does IRA work?
You can open an IRA account at banks, brokerage companies and other financial institutions. You will be offered more choices of investments within your IRA account than 401(K), such as stocks, funds bonds and notes. Either you or your broker choose the portfolio and then you can contribute money to your account.
Different types of IRA
- Traditional IRA
Like a traditional 401(K) account, a traditional IRA account is tax deferred. Your contribution to an IRA account and your capital gains will not be taxed, allowing an IRA to grow faster. When you withdraw, all the money will be taxed as ordinary income. For 2019, your contribution to a traditional IRA account should be no more than $6,000 unless you are 50 or older.
In most cases, contributions to traditional IRA are tax deductible. How deductible your traditional IRA are can depend on your modified adjusted gross income (MAGI) and whether your company offers a retirement plan. The chart below explains details as of the year 2019.
As for withdrawal, you are supposed to take out the money after 59.5, or there will be a 10% penalty. After 70.5, you have to withdraw required minimum distributions (RMDs). It’s worth noting that after RMDs begin, people can no longer contribute to a traditional IRA.
- Roth IRA
Like a Roth 401(K) account, you fund a Roth IRA account with after-tax dollars. You’ve already paid the tax, so you don’t have to pay anything when you withdraw. The contribution limit is the same with traditional IRA: $6,000 unless you are 50 or older. However, not everyone qualifies to contribute, there are income limits. For example, if you are single or file as head of household, can contribute up to the limit if your MAGI is less than $122,000. More details can be seen from IRS website.
You can withdraw your contributions from a Roth IRA account at any time for any reason. However, you’ll be penalized if you withdraw investment earnings before age 59.5. There are no RMDs for Roth IRA, you can leave it and contribute regardless of your age.
- SEP IRA
SEP IRA, standing for Simplified Employee Pension, is a type of traditional IRA for self-employed individuals or small business owners. Tax-deferred contributions go into a traditional IRA held in the employee’s name. Employers, instead of employees, contribute to the account.
- SIMPLE IRA
SIMPLE IRA, stands for Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. SIMPLE IRA allows employees to make contributions, at the same time, the employer is required to contribute.