Turbocharge Your Retirement Savings With an IRA
IRAs may provide tax savings, investment growth and flexibility.
An Individual Retirement Account, or IRA, provides investors with access to various investments such as mutual funds and exchange-traded funds. NerdWallet recommends online brokers and robo-advisors who specialize in selecting low-cost investments that match your risk profile.
Traditional IRA
A traditional IRA, the tax-deferred cousin to its Roth IRA counterpart, is an individual retirement account you can open and invest in independently. An IRA gives you an alternative way to save for retirement outside of an employer-sponsored plan such as 401(k).
Your Individual Retirement Account (IRA) provides the perfect way to invest in stocks, mutual funds, ETFs and CDs – and with its self-directed option you could even consider real estate, cryptocurrency and gold as possible investments.
To maximize your IRA’s potential, invest in a well-diversified portfolio. When possible, steer your investment mix towards stocks as much as it meets your time horizon, risk preferences and financial circumstances – however fees can eat into returns over time.
Roth IRA
Personal savings plans (TSPs) offer you tax advantages by enabling you to invest your pretax income and withdraw it tax-free in retirement. Some employers offer matching contributions which are tax deductible.
When investing in your Roth IRA, prioritize investments that offer steady long-term growth at low risk – such as index funds or exchange-traded funds that track broad market sectors such as U.S. stocks or emerging markets.
Target-date funds provide another effective option, working toward your expected retirement year and automatically adjusting its investment mix accordingly. They’re popular among 401(k) accounts but available as an IRA too if needed; any withdrawals prior to age 59 1/2 don’t incur an early withdrawal penalty provided they go toward expenses like buying your first home or paying medical expenses that won’t be reimbursed by insurance.
SEP IRA
SEP IRAs are employer-sponsored retirement plans designed specifically for small-business owners and sole proprietors, offering low start-up and maintenance costs, enabling you to invest across a broad spectrum of assets (stocks and bonds) tax-deferred. However, unlike their traditional counterparts they do not allow catch-up contributions, and you must begin taking mandatory minimum distributions by age 73 otherwise face penalties and taxes.
Contribute up to 25% of employees’ compensation each year into your Solo 401(k). Your contributions are fully vested immediately, yet you have the flexibility of choosing which years you contribute.
SIMPLE IRA
SIMPLE IRAs are employer-sponsored retirement plans that enable employees to save pretax income via payroll deduction. Employees can invest their contributions in various mutual funds and choose whether it gets automatically invested each year; plans can be found at businesses with one to 100 employees, unlike SEP IRAs and 401(k) plans which require employer matching contributions.
Employers may make matching or non-elective contributions of up to 3% of employees’ wages each year, and can alter this figure annually. They can also limit matching contributions to one percent for two out of every five years; and their 2% nonelective contribution always vests immediately, making SIMPLE IRAs a versatile solution for small business owners.
Annuities
If you have reached the limit of employer-sponsored retirement plans and still wish to save more, an Individual Retirement Account (IRA) offers many advantages – most importantly tax-deferred growth potential.
Put your money to work for you in a diversified portfolio of stock mutual funds or exchange-traded funds that reflect your time horizon, risk preferences and financial circumstances.
If you lack the time, interest or expertise to select and manage your portfolio yourself, consider opting for a target date fund or asset allocation fund instead. These professionally managed investment vehicles will automatically adjust their stock-bond mix as you near retirement – just watch out for fees which could eat into your returns!
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