This blog post may contain affiliate links. Learn more.
What is an IRA? How does it work? And what are the details I should know?
Ahh, you’re interested in understanding the breakdown of an IRA. Good for you! You see, retirement really is sexy, but not a lot of people make it this far. They don’t care about their retirement because… retirement is for old people, right? Wrong! (like this…)
Retirement is Sexy!
And this series is going to make you sexy, because who isn’t attracted to people who are savvy, confident, and in control of their money matters, money growth, and path to financial freedom?
So here we go, What is an IRA?
An IRA is an Individual Retirement Account (or “Arrangement” if you’re the IRS… woof, what does that even mean?)
An Individual Retirement Account is just that, for the individual by the individual, instead of by the employer.
Here’s how it works:
You can make a tax-deductible contribution to your IRA up to the annual max of $5,500. This means, any money up to $5,500 that you put in your new fancy retirement account can be written off on your taxes (or another way to understand it, your “taxable income,” which is the income the IRS wants a piece of, will appear smaller because it will have $5,500 taken out and placed in your IRA.
(Make between or over the range of $61,000 – $71,000? Go to ** below.)
The other benefit to an IRA is that the money you put in can grow tax-deferred each year. This mean the gainz (the money your money makes, also called “capital gains”) will not be taxed every year even though you’re makin’ money honey. This allows you to make more money!
Well, you do still have to pay taxes eventually–when you take the money out. And by eventually, I mean no earlier than when you reach age 59.5. You want to avoid taking money out of your IRA any earlier than age 59.5 because if you do, you will have to pay a 10% penalty on that money, plus ordinary income tax on top of that. Ugh… fees are not cool in my book. So don’t pull out too early. (yes, I know. “that’s what she said”)
Also, when you’re “of age” and take the money out, you will have to pay taxes on it at your regular income tax rate. If you’re planning to retire rich, like me, then you might be paying quite a bit more than you’re currently paying in taxes now, so setting up a Roth IRA is a great option for you to consider as well.
And that’s where we’ll pick up next week. I’ll walk you through what a Roth IRA is, what sets it apart from a Traditional IRA and why you might choose to go Roth (like this guy, but with worse hair and probably not as badass).
Also, if you’re looking for a platform to super easily set up an IRA, Roth IRA, or set up a SEP IRA if you’re self-employed (like I did the other week) check out Betterment. They’re low cost, transparent, and making it super slick and easy for you to start investing like your badass self should. Also… I like to think they’re keepin' me sexy.
**Make between or over the range of $61,000 – $71,000 and participate in an employer-sponsored retirement plan (like a 401k) this year? Of course, there is an exception to the tax-deductible part (there always is). If you make in this range or above it, there is a phase-out for the amount of money you can deduct on your taxes. If you exceed $71k then no dice, you don’t get the deduction, but that doesn’t mean an IRA still won’t benefit you. Read above about tax-deferred growth or consider the other IRA options in this series.