The Power of an IRA
The right investment account can make you a lot of money and save you a ton in taxes.
Unless you want to work the rest of your life, you need to be saving some money for the future, and you need that money to grow. That’s why savvy investors know to use an IRA for retirement.
in the United States, IRA stands for Individual Retirement Account. The government has created numerous types of these accounts to give people incentive to invest for their futures. The names can be confusing, and the details and rules can make your head spin. But if you play your cards right, starting an IRA for retirement can be a multi-million-dollar move.
if you play your cards right, starting an IRA for retirement can be a multi-million-dollar move.
If you’re joining me on the journey to financial freedom by following what the Bible says about money, preparing for the future should be an important part of your plan, and IRAs offer the best way to do that. Today, we’re going to highlight the best ways to use an IRA to build your personal wealth.
A Strategy for Changing Times
There was a time when most workers stayed with one company for decades and counted on a pension from that company to provide for their needs in retirement. Those days are largely gone, though. So you and I need solid strategies to build our own financial futures, because nobody else is going to build them for us. The Retirement Pyramid gives us a good blueprint for how we should do that.
In the last article in this series, we talked about building a good base for your retirement savings by maxing out your contribution to your company’s retirement plan. These modern plans aren’t as lucrative as yesterday’s defined-benefit pensions. But they still offer advantages for investors, because your employer matches the money that you’re investing.
Once you’ve maxed out your company’s retirement match, though, it’s time to turn to another wealth-building tool — the IRA for retirement. The idea of an IRA is this: You start a retirement account with an investment firm and work together with your investment adviser to build a portfolio of mutual funds, stocks and bonds that will meet your retirement objectives. Then, you make contributions to that account every month, and the value of your account grows as the companies you’ve invested in succeed.
It’s All About Taxes
What makes IRAs different than any regular investment account? It’s largely tax incentives. The government wants to encourage Americans to invest for retirement. So Congress created these special IRAs that people could use to invest without being heavily taxed.
If you buy stock on the open market (outside of an IRA), and sell it five years from now at a profit of $1,000, you’re going to have to pay what’s called “capital gains tax” on those earnings. Capital gains tax is currently 15%. That means you’ll have to give $150 of your $1,000 earnings to the government. But capital gains taxes don’t apply to most IRAs, which can save you a lot of money in the long run.
Avoid Taxes with the Roth IRA for Retirement
There are numerous types of IRAs, but the best to start with is the Roth IRA. Roth IRAs are fantastic opportunities for investors because the tax advantages are very compelling. When you invest in a Roth IRA, you’re investing with “after-tax” money (meaning that you’ve already paid income taxes on the money that you’re using to invest).
Your Roth IRA will likely be worth hundreds of thousands — or even millions — of dollars.
Decades from now, when you’re ready to retire, your Roth IRA will likely be worth hundreds of thousands — or even millions — of dollars. When you start drawing income off of that money, you don’t have to pay taxes on it. That’s the beauty of a Roth IRA — the growth is tax-free!
This tax incentive makes Roth IRAs better than the 401(k) or similar plan that your company offers. You don’t have to pay income taxes on the money you contribute to a company plan. But you will pay taxes on the growth of those plans. And if that account swells to six or seven figures, you’ll pay a lot of taxes on that growth. Far more, in fact, than what you saved in tax incentives on the front end.
Roth IRAs, though, save us from paying those back-end taxes. It’s pure, un-taxed profit. Your company’s retirement plan is only good up to the point that your employer is matching your contributions. After that, though, you should do your additional investing in a Roth IRA. You’ll get tax-free growth for the rest of your life.
Learn the Details and Get Started
Roth IRAs have some limits to keep people from using them unfairly to dodge taxes. You can only withdraw money from these accounts without paying taxes if you’re old enough to retire. There are limits for how much you can contribute to a Roth IRA each year, and certain people with very high incomes may not be able to contribute to a Roth.
For most of us, the best way to build a financial future is to have a Roth IRA for retirement. If you’re ready to begin that journey, find an investment expert you trust and get started.