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What is an IRA?
Having an IRA (Individual Retirement Account/Arrangement) is one of the most common ways for young adults to start investing! This is likely because these accounts allow for good return on your money, and have many benefits.
Before we begin, you must know that there are two types of IRA options: Traditional IRA and a Roth IRA.
The Roth IRA is the newer version, and is highly recommended by many in comparison to the Traditional Roth account.
However, we encourage you to weigh the pros and cons that are presented below to get a good idea of which would be best for your financial future! Be sure to check out our other articles regarding this investment method, to better understand if this is a good fit for your portfolio!
What is the Difference Between Traditional and Roth IRA?
When it comes to investing as a young adult, it is Important to review and choose the best type of IRA for your situation!
1. Traditional IRA: You invest with your pretax money.
This means that when it comes to the money you make, you invest it before taxes are taken from it.
It may look good on paper at first, but the downside is that it is taxed when you withdraw the money after retirement. You’ll be taxed much more later down the road if your account grows significantly over your lifetime, as it is considered taxable income when you withdraw.
2. Roth IRA: You invest with posttax money
The simplest way to imagine this is regarding the money you get to pocket after taxes are taken from it.
Sure, you’ll have less to invest upfront, but the great part about this is you won’t have to pay taxes on it later on! Know that you must have money in an account for over 5 years for it to be tax-free upon withdraw.
What are the Requirements to Have an IRA?
There are no income requirements to sign up for a Traditional IRA. However, to get a Roth IRA, you must have a job (earning taxable income) to obtain an account.
Income Requirements:
If you are single, you must be earning less than $135,000/year to contribute to an IRA.
If you are married, you must be earning less than $199,000/year jointly to contribute to an IRA.
How Much Can I Invest in an IRA?
You can invest up to $5,500 per year into an IRA account, as long as you are under the age of 50. This is approximately $458/month over the course of a year. If you are older than 50, you can put in $6,500 per year!
How Old Do I Have to Be to Get an IRA?
In short, signing up for an IRA depends on your age. For a Traditional IRA you must be under the age of 70.5. To open a Roth IRA, anyone can open an account as long as you are earning taxable income!
Regarding the traditional IRA, the age limit is due to the mandatory requirement to withdraw at this time.
For the Roth IRA, you could start an account for your child early. For example, if you earn by working at a restaurant at the age of 16, you can open a Roth IRA and get a huge head start on your retirement accounts!
When Can Withdraw from an IRA?
To take money out from a Traditional IRA, there is a mandatory withdraw time when you turn 70.5 years of age. To withdraw from a Roth IRA, there is no official set date for making a mandatory withdraw.
How Do I Start a Traditional or Roth IRA?
To start an IRA, you can go to your local bank, a brokerage, or a company online to obtain an account. My IRA is through Fidelity online. You can open an account in a day and start investing within days!
Bank: There will be limited investing options at a bank. If you aren’t a fan of CDs and money markets, this may not be a good option to use.
Brokerage: This may cause you more fees than if you set up an account by yourself. Watch out for paying too much! You may want to look for brokers that offer no-fee Roth IRAs, for example, to save money. The pro to this is that you know you’ll have a professional handling your accounts.
Online Company: You can start an account with a company like Fidelity if you’d like more control and convenience regarding your account!
When Can I Contribute to an IRA?
In short, you can contribute to an IRA at any time. For both traditional and Roth IRA’s, it is common to do either monthly or biweekly deposits.
Remember that everyone’s situation is different! You can contribute all the way until tax day (April 15), then it is considered the “next year”!
The timeframe that IRA’s run on go through April 15, rather than December 31st.
Okay, Let’s Summarize!
- There are some vast differences between Traditional and Roth IRA accounts, and you should be educated on both before making a decision to invest.
- The biggest difference between the two IRA options have to do with where your money comes from: pretax or posttax income.
Are you looking to own an IRA account? It’s a great way to get into investing, and there are many benefits! Remember to do thorough research before officially investing!
Don’t miss out on learning more!
- How to Achieve Financial Freedom with the 70/20/10 Budgeting Rule!
- The Beginner’s Guide to Understanding Passive and Active Income
- 7 Surprisingly Simple Ways to Earn $50 a Day!