How To Invest In An IRA: IRA Investment Rules & Options

Thinking about retirement is something everyone should do whether they are nearing retirement or still have a long ways to go. There are numerous options investors can consider that can serve as primary future or supplemental retirement income. One option everyone can consider is investing in an individual retirement account (IRA).

When An IRA Makes Sense

The first question you’ll want to ask yourself is, “Should I open an IRA?” For most people, it makes perfect sense. For instance, if you don’t have access to an employer 401(k) retirement plan, IRAs are an excellent alternative. However, even if you do have a pension (rare these days) or a 401(k) account, IRAs are a terrific way to supplement your retirement income, adding a significant amount of money to your overall nest egg, especially considering the fact that the future of Social Security is always uncertain.

A primary reason to consider an IRA investment as a part of your retirement strategy is to create a secure financial future. All too often people delay thinking about retirement because it seems so far off or they get caught up in their day-to-day routines, delaying taking action. In the meantime, they lose the opportunity to save and gain financial freedom in their golden years. Other benefits include:

  • Great starter account – Since anyone can open an IRA at any age, you can open your initial account while still in school or when you graduate. The earlier you start, the more compound interest you’ll earn over time, and the larger your account will grow
  • Tax benefits – When you invest your hard-earned money into a traditional IRA, you receive tax benefits and will be able to reduce your taxable income when you file your federal and state taxes each year, getting more value for your dollars.
  • Deferred savings – IRAs are a great investment opportunity because they offer generous tax breaks. For instance, with the Roth IRA, you don’t get a tax break when you invest; however, earnings and withdrawals you make later on are generally tax-free.

Whether you are a first-time investor or looking to potentially roll over an existing 401(k) to consolidate your accounts, opening an IRA makes sense for many reasons. Even if you want to keep your 401(k) where it is, you can still invest in an IRA to supplement your future retirement savings.

Looking at IRA options is a step worth taking because it only enhances your overall retirement strategy. If you have been thinking about opening an account but aren’t really sure about your IRA investment options and the rules associated with them, here is a rundown of what you need to know.

What Are Your IRA Options and the Rules Associated With Them?

Anyone thinking about their future can invest in an IRA, regardless of income. You can contribute up to $6,000 per year ($7,000 if you are aged 50 or older) to an IRA account, as long as contributions don’t exceed your salary. Nonworking spouses are eligible to open an IRA, as long as the couple’s taxes are filed jointly. Most IRA providers offer a wide variety of investment options.

Traditional IRA – Open to everyone, there are no income limits and contributions are tax-free in the year a contribution is made. It’s important to know contributions cannot be made after the account owner reaches age 70½ and, instead, minimum distributions must be taken out by April 1 of the next year. Withdrawals are not tax-free but portions of the contributions might qualify as deductions on your tax return.

Roth IRA – A popular IRA plan, the Roth IRA is the best choice when it comes to tax advantages. You are taxed on your money going in but withdrawals are tax-free if you keep your money in for at least five years. To qualify to contribute to a Roth IRA, your adjusted gross income (AGI) must be less than $140,000 (if filing single or head of household), less than $206,000 if married and filing jointly or as a widower. If your AGI exceeds these amounts, you can still make partial contributions. People as young as 14 years can contribute to a Roth IRA.

Managed IRA – Some investors prefer to turn to professionals to help guide decisions or choose investments rather than do this themselves. In this case, a managed IRA makes sense. Traditional and/or Roth IRAs can both be opened; the rules are the same as if you were managing them yourself. The difference is your provider helps you to make objective and financially sound decisions that will potentially increase your eventual return on investment. There are even digital management options you can choose from.

Managed SEP IRA – A great option for small business owners, the SEP IRA allows employers (with at least one employee) to contribute to traditional IRAs set up for their employees and themselves; employees do not make contributions. Only the first $290,000 of employee income is considered, and employers can contribute up to 25 percent of the employee’s income or up to $58,000, whichever is lesser. Contributions belong solely to employees but they must be at least 21 years old, earned at least $650 and have worked for the company for three of the last five years.

When looking at IRA savings options, it’s important to understand the IRA investment rules of each one. This will help you better determine the right IRA for you, and a knowledgeable company can help you to sort out your options and give you the information and tools to help you decide.

How To Invest In An IRA

While considering IRA options, you’ll probably ask yourself how much you should invest in your IRA and how often should you contribute. These are great questions and your provider can help you to narrow down the right IRA and contribution amounts based on your lifestyle, income and other retirement accounts you may already have established. If you are thinking of rolling over your 401(k) but aren’t really sure, you can use our rollover calculator to help you crunch the numbers and see if you can save money on fees.

You can learn more about your IRA options by visiting our website. If you want to speak to a person, book an appointment with us today. Our free concierge service can help you with your IRA selection, even if it isn’t with us.

With IRAs, the earlier you start, the better. But that doesn’t mean it’s ever too late. Even if you have already delayed thinking about retirement, you can still begin today!