IRAs are a great way to grow funds without having to give a large chunk of it to Uncle Sam. You can reinvest dividends, capital gains, and any other income generated from the funds in your IRA.
Here are three reasons why you should invest in an IRA:
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1. You can add more funds anytime
It’s generally a good idea to start investing earlier in life. The longer you wait before planning for your retirement, the longer you will have to play catch up later on. For example, if you start putting money into your IRA in your early 20s and get decent returns on your investments, you’ll get more value from the compounding effect of your gains. Keep in mind, you can’t contribute more than $5,500 per year to your IRA.
A person who opens an IRA later in life, won’t get as much value from the compounding effect of the money. That person will also deal with lots of unnecessary stress when he/she realizes there isn’t enough saved up to cover retirement.
2. You get tax benefits
To better understand how these tax advantages work, you need to be familiar with the two different types of IRAs: Traditional and Roth. With the former, all contributions are taken out before taxes are applied to your income. That effectively reduces your gross income depending on how much you funnel to your IRA, meaning when you e-file at tax time, you pay less in income taxes.
If you decide to take money out of a traditional IRA, the only penalty is that you’ll have to pay income taxes on the withdrawal.
Roth IRAs are relatively new and more exciting. With these, you can’t withdraw funds from your account before retirement, and you pay taxes on the amount you invest. However, once you retire, you’re free to withdraw your contributions and any income generated from them without paying any taxes.
Deciding what type of IRA to go with comes down to your tax preferences. If saving on taxes now is more important to you, then a traditional IRA is the better option. However, if you would rather pay taxes now and not have to worry about paying taxes on your contributions and earnings in the future, a Roth IRA serves that purpose.
3. You have multiple investment options
There are many ways you can invest your money when you open an IRA. Institutions like investment brokerages and banks often allow you to invest in stocks, mutual funds, money market funds, and things of that nature, but there are many other things you can try your luck with.
You can also invest in cryptocurrencies, rare coins, or real estate investments like flipping homes for sale in colorado springs. Just make sure the institution you decide to open your IRA with allows the type of investments you want.