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What You Should Know When Creating an IRA

  • April 29, 2022

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What You Should Know When Creating an IRA

An individual retirement account (IRA) is a fantastic way to accrue your money and take advantage of tax benefits in the future. However, there are a few things you should know when creating an IRA that will help you get the most out of your plan.

Where To Open an IRA

Knowing where to create your account is the crucial first step in saving for your retirement. If you already have a bank account, creating an IRA with your bank is a safe choice that offers the comfort of customer support to guide you through the process. Robo-advisors are another option for a more accessible and lower-maintenance approach to creating an IRA. However, you may feel uncomfortable trusting a fully digital space with your nest egg.

Traditional vs. Roth IRA

It’s also crucial to know that there are different types of IRAs. You must pick the one that’s right for you.

  • A traditional IRA allows you to deposit money on which you have not paid taxes. These earnings build up, but you pay taxes upon withdrawal. Since many people enter a lower tax bracket after retiring, a traditional IRA can result in lower payments post-retirement.
  • For a Roth IRA, you deposit money on which you have already paid taxes. The money in this account is allowed to grow, and you can withdraw money tax free after at least five years, provided that you meet other requirements such as age or purchasing a house.

Other varieties of IRAs also exist to serve your personal monetary needs, but these are the most common.

Having an IRA With a 401(k)

You can, and possibly should, have both an IRA and a 401(k). These two accounts offer flexibility and diversity when you’re planning for your retirement. However, something important you should know when creating an IRA relates to contributing to these two accounts.

Typically, the money or value of any non-cash assets you contribute to your IRA is deductible when you file your taxes. Having a 401(k) or similar retirement plan through your workplace means you might be unable to deduct the contributions to your traditional IRA. In a situation such as this, a Roth IRA may be ideal.

If you leave the company where you have a 401(k), remember to roll over the money from this company account to your IRA. When you make this request to your employer or former employer, inform them that you want this to be a direct rollover. The money should never come to you personally, as that will result in you paying unnecessary taxes of up to 20 percent. If you don’t have an IRA when you request a rollover from your company 401(k), you’ll need to create one for the direct rollover to go through.