Which Type of IRA is Best?
With an Individual Retirement Account (IRA), you can save for retirement while potentially taking advantage of tax breaks. Which type of IRA would work best for your specific financial circumstances and goals is up to you.
Traditional and Roth IRAs provide opportunities for almost anyone with earned income to invest, including those who already have access to workplace plans such as 401(k). Here are some of the ways they may benefit you:
Follow the withdrawal rules and your earnings will accrue tax-free in an IRA investment account, creating a larger pot for retirement savings – especially those in higher tax brackets.
Dependent upon your projected income and tax rates in retirement, contributing to both types of IRAs may make sense. If you expect that you’ll pay lower taxes after retiring then traditional IRA contributions might make more sense; they allow for tax-deductibility of contributions now while paying taxes at lower rates in future withdrawals.
If your tax rate will increase in the future, consider contributing to a Roth IRA as soon as possible. Withdrawals from a Roth IRA are tax-free at any age so withdrawals from it allow accessing investments without paying taxes on them – an ideal solution for holding stocks that pay significant dividends or municipal bonds with high yields that might otherwise incur taxes in other accounts. A Roth IRA allows you to maximize their growth potential.
More Investment Choices
No matter your experience level or investment goals, there are multiple investment solutions available to you. Your IRA provides access to mutual funds, ETFs, stocks, bonds and real estate investments; additionally you could open an account with an automated advisor (robo-advisor) or meet with an advisor in order to create a tailored approach that aligns with your risk tolerance and retirement goals.
Charles Schwab and Fidelity stand out among IRA providers with comprehensive offerings, such as competitive trading platform rates, vast educational resource libraries, excellent customer service and reasonable minimum account opening requirements, making getting started easier than ever before.
Vanguard target-date funds provide another viable investment solution; these automatically rebalance assets based on how long it is until retirement and your risk tolerance. They’re widely available through brokerage accounts and online IRAs; you could also opt for more specific investments such as rental real estate or precious metals which require larger accounts with greater diversification.
Flexibility in Asset Allocation
Many IRAs allow you to invest in various assets such as stocks, mutual funds, annuities, CDs and bonds for maximum flexibility compared to the plans offered through your employer.
Diversifying is key to mitigating risk and potentially increasing returns, and an optimal asset allocation strategy in flexible funds provides you with a diversified portfolio that is constantly being adjusted in terms of asset mix.
Tax-loss harvesting can also be a useful strategy for increasing tax efficiency in accounts where investment gains and income are taxed, helping reduce taxes on investment gains and boost after-tax returns.