What’s your take on socking away money for retirement with an Individual Retirement Account (IRA)? Sounds great but you procrastinated too long? You probably still have time to contribute for 2019. But most won’t get around to it.
While many Americans get the idea an IRA is one of the best retirement savings tools around, the majority aren’t actually contributing to one. Yet, an October Bankrate survey reported only about 27% meet or exceed their own retirement savings goals. The rest will come up short. So why don’t more take advantage of an IRA if it’s such a good thing?
Many Don’t Realize Power of IRAs
A shocking 35% who answered another survey (from TIAA-CREF) said they don’t really understand what an IRA is and how it works – and nearly half those under 35 (about 47%) said they don’t know. While it’s logical that someone who doesn’t understand IRAs wouldn’t jump in and use one, it’s a serious disadvantage to just ignore this beneficial tool. Time to take some action to start learning.
Furthermore, one third of those not using an IRA said they have a retirement plan available at work so they don’t feel they need both. Despite the access, that doesn’t actually mean they contribute to their employer plan either. Again, a serious disadvantage to leave that benefit on the table, and time to take action.
So let’s review the IRA basics…
- An IRA is a retirement savings account you can open most anytime. It’s a personal account, in your name. You can have more than one. But IRAs are not accounts with joint ownership. Only one person is the account holder, or owner. So if you’re married, you each would have your own IRA account.
- You make “contributions” to your IRA account in years you earn income. Each year, you decide whether to make an IRA contribution or not – it is not required to make a contribution every year. You may make an annual contribution as one lump sum or by several deposits, but you must follow the rules about contribution limits. There are penalties if you don’t follow the rules.*
- An IRA is a great way to harness the power of compound interest. When you save money and let it earn interest or dividends over several years, you let your money make more money for you instead of you working to make every dollar. This power of compounding is like a snowball which gathers size and speed as it rolls downhill. Many are amazed at how compounding helps grow an account over time.
- You can get an IRA in one of two flavors. One is the traditional IRA, where you contribute before-tax dollars. With this type, you may potentially get a break on your income tax the year the contribution was made. The other is a Roth IRA, which uses after-tax dollars (but no tax break on a contribution) and grows tax-free. You can have both types of IRAs, but they are not mixed together in one account. You have a separate account for each one, so you can follow the rules.
- You can have an IRA on your own, in addition to a retirement plan through your employer. You don’t have to choose one or the other, and many Americans actually make good use of both their employer’s plan and an IRA. Your employer should inform you of the rules for the plan at work. If you open an individual IRA/Roth IRA at a financial institution (such as Schwab, Fidelity, Vanguard, a bank), you should ask about the rules for the account.
This means you could save for retirement three ways:
- your employer plan,
- your traditional IRA account(s),
- your Roth IRA account(s).
So think of your retirement savings as a large storage shed with three separate rooms – one designated for IRAs, one for Roth IRAs, one for employer plans. In each room, you can put several storage boxes, or accounts. Then in each storage box or account, you can store several types of tools for saving and investing. What tools might you want to include? You can choose mutual funds, Exchange Traded Funds, stocks, bonds, Certificates of Deposit, money market or regular savings accounts, and more. You might not start with several tools in every storage box, but may add them over time and as you wish to diversify.
Consider IRA a Work-in-Progress, Not One-and-Done Task
Many of us don’t actually give too much thought to what tools to include within our retirement storage shed. With employer plans, you might have limited choices. Or perhaps you just pick something that’s recommended and never change.
There are plenty of decisions that make an IRA a work-in-progress task that you should look over periodically. Actually about 1 in 7 Americans (15%) spend two hours or more to plan an IRA investment, according to the TIAA-CREF survey. Do you spend more time than that to research/choose a special night out or one-time purchase or a vacation? Perhaps it’s time to focus on a little planning now so you don’t come up short when it comes to retirement savings.
*The IRS has publications that detail the rules for IRAs, Roth IRAs and other retirement savings tools at http://www.IRS.gov. This article is not meant to be construed as financial advice.