Why You Need an IRA Account

You can powerfully enhance your retirement with an IRA account.

Aug 29, 2014 at 11:35AM

Www
Photo: Lendingmemo.com via Flickr.

You know you need to sock away lots of money for your retirement, as Social Security alone isn't likely to suffice and you probably don't have a pension. There's a good chance you're aware of, and using, a 401(k) plan at work. But don't forget about another powerful retirement-saving tool: the IRA account.

The IRA account comes in two primary flavors: the traditional IRA and the Roth IRA. Each offers tax-advantaged retirement saving, but in different ways. With a traditional IRA account, you contribute money on a pre-tax basis, subtracting your contribution from your taxable income so that your tax hit is smaller. The money is taxed later, at your ordinary income tax rate, when you ultimately withdraw funds in retirement. With a Roth IRA account, you contribute dollars on a post-tax basis, and when you withdraw money in retirement according to the rules, it's all tax-free.

The traditional IRA account is especially compelling for those who are in a high tax bracket now and expect to be in a low one in retirement, as the traditional IRA lets you delay the tax hit. The Roth is great for those who are many years away from retirement, as it permits a lot of growth that will eventually be enjoyed tax-free.

Big growth
There are limits to these IRA accounts, of course. High earners may find that their ability to contribute to a Roth is reduced or eliminated, and their ability to make deductible contributions to a traditional IRA may be restricted as well. Still, most of us can contribute up to $5,500 in 2014, plus an additional $1,000 for those of us who are age 50 or older.

Those sums may not seem like much, but over long periods, they can grow significantly. Give an online calculator a whirl and you can see how much you might amass with regular contributions. As an example, assume you're 40 and planning to retire in 25 years at age 65, and you make annual $5,500 contributions that grow at about 8% per year. You can accumulate a Roth IRA account worth about $400,000 -- which will be all yours, tax-free.

Let's run the numbers for a traditional IRA account, too. If you save the same sum over the same period and also earn 8% on average, you'll amass around $434,000, which will be taxed on withdrawal. If it gets a 15% tax haircut, it will end up worth nearly $370,000.

What an IRA account can and can't do
While an IRA can be a powerful tool to help you sock away money for retirement, it probably can't meet your needs alone, as the IRA contribution limits are relatively low. That's especially true if you're near retirement and don't have many years in which to sock away money. Consider the examples above and imagine how much faster your nest egg would grow if you could chip in more each year. The contribution limits for 401(k) accounts, for example, are far higher, totaling $17,500 in 2014 (plus another $5,500 for those 50 and older). It's often best to contribute aggressively to both account types if possible.

On the other hand, an IRA account does have some distinct advantages, including a wider variety of investment options than most 401(k)s offer. Open an IRA at any fine brokerage, and you can invest in just about any stock or bond, and gobs of mutual funds, too. With a 401(k) account, you'll typically have a limited range of options, chosen by your employer or the plan management firm.

There's more to learn about IRAs and retirement planning. Take some time to get savvier, and you can end up living the retirement you've dreamed of.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers