If you have finally decided to get on the right track to retirement, good for you. Better late than never, after all. There are a lot of people who have retirement accounts, as well as they should. However, there are far too many people who are either too lazy, too ignorant or don’t have the right retirement planning tools to get their accounts started.
There are many different retirement options open to you, the most useful being the IRA or individual retirement account. This is the account that offers the most control over your retirement funds and it is definitely something everyone should invest in.
The 401k Retirement Plan
A lot of employers offer the traditional 401k retirement package for their employees. There aren’t many features of the 401k compared to an IRA because it is mostly controlled by the company. Basically a predefined percentage of your salary is deposited into the 401k each month before you are given your paycheck.
This is a great option for people who plan on working in the same company for the rest of their working days until they retire, and for those people who don’t think they can handle the responsibility and complexities of managing a retirement account fully.
However, for those of you who want more control over the money that is going to tide you over after retirement an IRA is the way to go.
Two IRA Paths
There are two types of IRA accounts: the traditional IRA and the Roth IRA. Both of them are great and the differences between them are minor but important to understand. The choice between the two is usually made based on personal preference and for tax reasons.
Some people like the flexibility IRAs offer over a traditional 401(k) plan. For example, as an investor you may feel the need to have some added security to your portfolio based on your needs. To do so, a person might consider turning their retirement account into a precious metals IRA. This can be done to any retirement account simply by getting a gold or silver IRA rollover done whenever you want. After this, the precious metal IRA works by buying up physical gold or silver for the account with the money in it. This keeps the value of the funds in your account safe even in the current economy.
The Difference Between Traditional and Roth IRAs
The major difference between the two types of IRAs is the way in which tax is levied on the money contributed to the account.
In the traditional IRA, income tax is charged from the contributions you make AFTER you retire. This means that you are taxed for the money you withdraw. If you are in a lower tax bracket at this time, this will actually save you a lot of money.
Basically, you make contributions into the IRA after you get paid every month. However, the contributions you make are made BEFORE your paycheck has the income tax deducted from it. This means that you pay less tax now.
When you retire, any withdrawals you make from the IRA will be charged income tax, according to the tax bracket you are in at that time in your life. This sort of tax-deferred account may seem like a good idea right now but it might be more desirable for some people to go for a Roth IRA instead.
In a Roth IRA, you make the contributions to your account from the money you have earned that month, net income tax. This means that you pay the full amount of income tax for your entire paycheck then make the deposit from what you have afterwards. The perk of this account is that when you retire the withdrawals you make from the IRA are tax free. You won’t have to pay a cent. For a lot of people, this is more desirable because there won’t be any tax stress after retirement.
Make sure you choose an account based on your own personal preferences and get started early. As this post on retirement planning shows, the sooner you get started the better. If you follow the right path you should be able to enjoy a happy retired life.
Questions: What type of IRA do you have? Why did you choose that style? Have you ever invested in precious metals insider your retirement accounts?