The countdown is underway. As of today, investors have exactly four weeks to fund their Individual Retirement Accounts for 2017.
In case you don’t know, an IRA is a special account type that lets Americans grow their long-term savings without capital-gains taxes. There’s a limit to contributions each calendar year, with the ability to add money retroactively through tax day. For 2017, that means Wednesday, April 18. Exactly 19 business days from today. (Don’t forget markets are closed for Good Friday on March 30.)
It’s a good time to be reading this message — especially for so-called “millennials.” The younger crowd’s financial challenges like student debt and lack of affordable housing are well known, but those can’t be used as excuses forever. Wages are on the rise and the the economy continues to expand. It’s not 2008 anymore.
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Emotions, after all, are a big obstacle for investors. Fear and greed. Fear can cause us to sell at the wrong times, but it can also keep us from buying when we should. The big risk over the long run can then become FOMO, or “fear of missing out.” That’s when stocks are running away from us and we buy too high. The best way to overcome that risk is to steadily put money to work over time. Invest, invest, invest. Millions of Americans have retired wealthy by saving over the years and letting the market work for them.
Few products are better for this purpose than IRAs. There are two main types: Traditional IRAs and Roth IRAs.
Traditional IRAs use pre-tax money, so contributing to them can reduce your bill to Uncle Sam. They grow tax-free over time, with capital-gains or dividends reinvested. Funds are pretty much locked up until you’re 59-1/2 years old, although there are some special allowances for early withdrawals. Once you’re over the age limit, you can take the money out to pay for retirement. And, at that point, it’s treated as “regular income.” Given the fact you won’t be working any longer you may have less income and therefore a lower tax rate. At least, that’s the general idea.
Roth IRAs, named after a Senator from Delaware, are funded with post-tax money. There’s no tax benefit in the present day, but the benefit is you won’t owe anything to the government when funds are used down the road.
So which is better? Any type of retirement or trading accounts need to fit your individual financial situation. Consult with your Tax and financial adviser to determine which is better for you. One common view is that people with fatter paychecks should use traditional IRAs. After all, they have more income to offset. Alternately, people with lower salaries may want to focus on Roth IRAs because they offer better tax advantages over the long-term. Early-withdrawal rules are also looser.
In conclusion, IRAs are a powerful tool for savers. Everyone owes it to themselves to understand their benefits and consider whether they’re right. The clock is ticking but there’s still time to act.