Many people worry about maintaining the same lifestyle they have had post-retirement. Hedging against economic disruptions early on can definitely help you stay financially secure after you retire. Since there are many retirement plans to choose from, it might be hard to pick the best one. However, many people opt for IRAs (individual retirement accounts), as they can be set up personally without the need for an employer. One question remains though: How can you maximize your IRA gains? To get the answer to this question, check the next few smart moves you can make with your IRA.
Invest in an IRA Early
Some employees forget about retirement until they find it staring them in the face! Not setting up an IRA early on can put you in a tight situation post-retirement. Like any other investment, the contributions you make to your IRA need time to grow. So, if you set up your account just a few years before retirement, you will not reap the benefits you are dreaming of. If you are in your 30s or 40s, it is certainly time to start investing in an IRA. Waiting any longer than that can have severe consequences in the long run.
Opt for a Roth IRA
There are mainly two types of IRAs: traditional IRAs and Roth IRAs. Both kinds entail certain tax benefits. Nonetheless, Roth IRAs are agreeably more superior if you are looking for long-term advantages. It all boils down to how your contributions are taxed. If you have a traditional IRA, your contributions are tax-deferred, meaning that you do not pay taxes on these contributions until you reach retirement and start withdrawing the money. On the other hand, you have to pay taxes on the contributions you make to your Roth IRA. Nonetheless, when you retire, the money you withdraw will be tax-free. It is easy to think that delaying taxes is a smart move, but it will actually hurt you in the future, especially if you end up in a higher tax bracket than your current one.
Roll Over From a 401(K)
If your employer has already set up a 401(K) plan for you but you do not feel that it is the best option, you can then roll over your funds from it to an IRA. As mentioned in the thorough article at this link, a direct rollover is your best bet if you want to go down this road. Generally speaking, it does not entail any complications or extra taxes. On the contrary, if you withdraw the money from your 401(K) to put it in your new IRA, there will probably be a 10% penalty. Thus, it is always a smart move to opt for a direct rollover.
Keep Your 401(K)
Some employees think that it is impossible to have an IRA and a 401(K) plan at the same time. However, this is simply a misconception. Financial experts assert that you can simultaneously have a 401(K) and an IRA if you can make contributions to both. Because 401(K) plans have many advantages, retaining yours can be a smart choice. What is great about 401(K) plans is that your employer partially matches your contributions up to a percentage. Most employers usually pay $0.50 for every dollar you contribute to your 401(K). If you do not want to lose this support, it is better to keep your 401(K) when you open up an IRA.
Make Monthly Contributions
Many IRA holders make annual contributions to their accounts. Nevertheless, this is considered a fatal mistake since it does not allow your contributions to grow. Additionally, it can be financially draining to pay a big lump sum every year. This is why it is important to contribute monthly to your IRA instead. This strategy allows the money you pay at the beginning of the year to grow exponentially. It does not matter if the sum you pay every month is not that big, as it will compound and generate more profits. Thus, at the end of the year, the sum of those compound small payments will be higher than the one big annual contribution you used to make.
Having a solid plan for life post-retirement is a must, which is why many people opt for IRAs. Thanks to their huge benefits, IRAs, whether traditional or Roth, are on the rise. To make the best out of your investments, make monthly contributions to your IRA, and choose a Roth account. Also, if you have a 401(K) and cannot sustain it in addition to an IRA, consider rolling your fund over to your new account. Most importantly, start now if you haven’t already to avoid any financial trouble down the line.
