Unfortunately, 15% of Americans have absolutely no retirement savings. And even having savings might not be enough, with a whopping 45% of Americans fearing they will run out of money in retirement.
What is preventing you from saving for retirement? Even if your employer doesn’t offer a plan or if you are self-employed, there are still options available for you to put money aside for retirement. Individual retirement accounts, or IRAs, are a versatile option that offer major tax incentives.
Let’s review some of the reasons why an IRA makes sense for retirement savings.
Tax benefits while also saving for retirement
With the exception of Roth IRAs, all other IRAs let you defer paying taxes until you start to withdraw funds, at which point you’ll pay income tax. Roth IRAs use a reversed schema: you pay your taxes upfront, then receive distributions tax-free. Depending on your financial situation now, tax deferment may seem tempting; if you are nervous about tax rates going up by the time you retire, you might choose a Roth IRA. Either way, IRAs offer tax benefits that can align with your financial goals and savings timeline.
More asset choices than a 401(k)
Plans like 401(k)s are usually restricted in terms of what you can buy, limited primarily to stocks, bonds, and mutual funds. The savviest investors often want to diversify their holdings further, to increase the likelihood that something they hold will remain stable or even perform well, even in the case of an economic crisis like a recession.
Self-directed IRAs are the best example of the wide asset selection that can be yours with an IRA. They have the widest range of asset choices; basically, if it’s legal with the IRS, it’s legal within an IRA. Think about things you’ve wanted to buy, like crypto, and do it within an IRA so you can make use of tax benefits.
More options for investing and saving
There are more types of IRAs available than types of plans like a 401(k). These are designed so that there’s always something to meet the needs of an individual. Choose from the widest possible range of assets as noted above with a self-directed IRA, or stick to a conventional one. Pay taxes now with a Roth IRA, or defer them with a traditional, or turn to a SEP or SIMPLE if you’re a small business owner. There are even “spousal” IRAs.
Your employers doesn’t offer a retirement plan
Small business owners often struggle with the costs involved to set up and maintain a retirement plan like a 401(k), particularly when contributions or matching are required of them. Fortunately, individuals can open an IRA on their own using a traditional or Roth IRA. Again these can be purchased as conventional IRAs, offered by more financial establishments, or as self-directed IRAs, which offer the widest range of asset choices.
Lower costs to set up and maintain, with maximum contribution flexibility
Even IRAs set up by employers are generally simpler and less costly to establish and maintain, freeing up more money for the business or even for contributions in the first place, and bearing more flexibility than a plan like a 401(k). If you’re self-employed, a SEP IRA may offer the high contribution limits you’re looking for, to save the most for retirement.
A SEP IRA also has the maximum flexibility on timing of contributions; if an extension is filed, the deadline for contributions to a SEP IRA for that filing year becomes that updated extension deadline. Small businesses may consider a SEP or SIMPLE IRA for their employees, depending on what fits in best with their financial landscape.
The sooner you open and put money into your IRA, the sooner you will be able to start leveraging the power of its potential for growth. The exact sources of growth will vary depending on the assets you select, but the basic premise is the same: with time, your retirement savings will accrue more value. This can yield major rewards come retirement.