5 Reasons to Contribute to an IRA
If retirement is on your mind, you’re probably familiar with IRAs. But did you know an IRA can provide more than just a place to grow your nest egg?
Compared to other retirement plans, IRAs offer some unique advantages. Whether you’re looking for tax benefits or access to emergency funds, here are five good reasons to start contributing to an IRA now.
1. (Nearly) anyone can open one.
Whether you’re self-employed, working for a company, or earning a living in the gig economy, just about anyone can open an IRA.
Why does this matter? Many employees who work for a company have the option to contribute to a 401(k) retirement savings account. But if you leave the company, you can no longer contribute to that account. And if you work for yourself, you may not be able to contribute to a 401(k) at all.
IRAs are tied to individuals, not employers. That means you can open an IRA at any time. The only requirement to open an account is that you have earned income, whether you’re self-employed or working for an employer.
You can also open a rollover IRA also if you need a place to transition a 401(k) from a previous employer. Just be aware that if you roll a non-Roth 401(k) into a Roth IRA, you’ll have to pay taxes on the rollover amount, since Roth contributions are made after taxes (more on that below).
2. There are tax benefits.
Unlike traditional investment accounts, your earnings in an IRA grow tax-free. This can help you maximize your retirement savings over time, especially if you start saving early. The sooner you begin contributing, the longer your earnings will have a chance to grow.
There are also additional tax considerations—and advantages—depending on whether you opt for a traditional or a Roth IRA.
With a traditional IRA, your contributions (up to $7,000 in 2024) can be deducted from your taxable income. This reduces the amount of income tax you owe.
Alternatively, if you contribute to a Roth IRA, you make post-tax contributions. That means you pay taxes on your contributions at today’s rate, instead of paying taxes at a future (and possibly higher) rate in retirement. When you start withdrawing funds in retirement, you won’t owe any taxes on those distributions.
Both traditional and Roth IRAs are governed by additional rules, including income-based restrictions on opening either account type. Work with a financial professional to decide if a traditional IRA or a Roth IRA is right for you.
3. You'll have access to emergency savings.
Usually, if you withdraw money from an IRA before age 59 1/2, you’ll face a penalty. But in certain cases, the money in your IRA can double as a rainy-day fund before you reach retirement age—without incurring fees. This can provide a cushion if you need emergency money in specific situations.
For example, you can withdraw early from a Roth IRA without fees if you're using the funds toward a first-time home purchase, as long as you’ve had the account open for at least five years. You may also be able to withdraw without facing penalties if you use the money to pay for medical bills or certain education expenses.
Before you dip into your IRA savings early, check with a financial professional. Make sure any early withdrawals follow IRS rules to avoid incurring any fees or penalties.
4. IRAs can boost savings for small business owners.
When you own a small business, you might miss out on the chance to contribute to an employer-sponsored retirement plan, like a 401(k).
If that’s your situation—or if you’re self-employed—you may be eligible to open a SEP or SIMPLE IRA. These IRAs are specifically for business owners. They offer higher contribution limits than individual IRAs, which can provide a major boost as you save for retirement. Plus, you can maximize your savings by contributing to an individual IRA in addition to a SEP or SIMPLE IRA.
5. They offer investment flexibility and control.
IRAs offer flexibility for every type of investor. If you like to be hands-on with your investments, you can take an active role in managing your portfolio. If you prefer to set it and forget it, you can invest your contributions in a target fund designed to optimize growth while reducing risk as you near retirement age. Just remember that all investments carry the risk of losing your initial investment.
Invest wisely. Retire with more confidence.
An IRA is a smart choice to complement your retirement strategy. Whether you select a traditional. Roth, SIMPLE, or SEP IRA, an investment in an IRA can provide an opportunity to reach your financial goals before (and after) retirement.
