all about IRAs (and why millennials need to invest in them now)

Photo Credit: Aidan Meyer

Photo Credit: Aidan Meyer

If you thought after reading my last two posts that you now knew everything you could ever want to know about retirement, well, I get it.  It’s a brain overload.  However, I hope I’ve given you enough time in between my posts to unwind and let it all settle in your mind…because now it’s time to continue our retirement education. Variety is the spice of life (or so they say), and even though employer sponsored retirement plans are a great option to get started with, you can’t discount the other major players in the retirement game:  Individual Retirement Accounts, also known as IRAs.

I know the term itself may make some of you quiver in your boots out of fear, but I started contributing to my Roth IRA (explained later) when I was in high school.  YES, it is simple enough that even a high school kid could figure it out.  Feel better now?  Good.  Now, don’t deem yourself a slacker because I began this venture almost 10 years ago.  I can guarantee I was contributing very (very) little during those first 5 years or so.  However, once I graduated I ramped up my savings, and I am slowly making gains towards my retirement goal.  Only 35+ years to go!  So here’s the information you need to get started as well – take it all in and then start saving, ladies!

1)  Traditional IRAs

First note of business:  don’t think of an IRA (traditional or Roth) as an investment itself.  It does not represent a company (like stocks) or a loan from the government (i.e. bonds).  Instead, an IRA is basically like a folder that holds your investments, and you get certain tax benefits from keeping them there.

A traditional IRA is something that you will open on your own – any financial advising company (i.e. Edward Jones) or online brokerage firm (the TDAmeritrades of the world) offers IRAs.  All you do is open an account and then choose how you would like to invest the money you put into it.  Piece of cake!

Some key notes about traditional IRAs:

-    These accounts are tax-deferred, meaning you pay taxes when you take the money out, not when you put it in.  Pro:  You initially have more money in the account to grow.  Con:  You get taxed on your contributions and your earnings when you withdraw your money.

-    You must start withdrawing money from this account by age 70 ½.

-    The maximum amount you can contribute per year for 2014 is $5,500.

2)  Roth IRAs

Like traditional IRAs, a Roth IRA is a “folder” in which your investments will reside and is something you open on your own (i.e. not through your employer). However, here are the key differences between the two:

-    Roth IRAs are taxed up front, so when you withdraw the money during retirement, you will not have to pay taxes on it.  Pro:  All of your earnings will never have to be taxed.  Con:  Your initial contribution will be smaller than that of a traditional IRA (contribution less taxes).

-    If you earn too much money, you cannot contribute to a Roth IRA.  For singles, you cannot contribute if you earn more than $129,000.  For those married filing jointly, that limit is $191,000.

-    You can withdraw the contributions (but not earnings!) you make to a Roth IRA at any time without having to pay penalties.  For instance, let’s say I put $5,000 into my Roth each year for the past 3 years, and I’ve earned $2,000 in appreciation/dividends.  I can take out $15,000 without getting penalized but must leave the $2,000 in the account.

-    Money can be left in the account for as long as you like (oh, the freedom!).  In other words, you don’t have to start taking money out at a certain age like the traditional IRA.

-    Contributions limits are the same as traditional IRAs:  $5,500 for 2014.

Well, there you have it.  IRAs are great vehicles to pad the contributions you make to your employer sponsored retirement accounts, and I encourage you to open one up for yourself.  You’ll be one step closer to living out the retirement you always dreamed of, and who doesn’t want that?  Get after it, girls!

BB Bit (of Advice):  Start contributing to one of these only after you have contributed the max (i.e. at least up to your employer’s matching contribution) to your 401(k).  And go for a little variety – if your 401(k) is tax-deferred (meaning earnings from that will have to be taxed in the future), invest in a Roth IRA, where your money will grow tax-free.

Photo Credit: Geoffrey Arduini

Photo Credit: Geoffrey Arduini