The 2010s have come to a close, but they were very kind to many people financially, as the stock market recovered from the worst recession in 70 years and core unemployment fell to extremely low levels. Yet as we begin a new year and a new decade, most of us still have more work to do to reach our long-term financial goals.
Whether you intend to stop working entirely when you retire, or just aim to reach that age with the freedom to do whatever you want, you'll need to start working toward that target early, and keep at it steadily.
One of the best things you can do to get yourself on track is to open an individual retirement account -- and if you haven't already done so, now's a great time to get started.
The biggest benefits of IRAs
IRAs are among the most flexible and easily understood retirement savings tools, and 2019 brought them some added features, including a boost in the amount you can contribute. Those with enough income from work can contribute up to $6,000 for 2019, and people 50 or older can add an extra $1,000 to that. Those same limits will apply in 2020 as well.
Most people can still choose between the two IRA options. Traditional IRAs provide investors with an upfront tax deduction on their contribution amounts, while Roth IRAs provide no tax breaks when you contribute, but allow investors to withdraw their money tax-free in retirement. There are income limits for Roth IRAs that prevent the wealthiest taxpayers from contributing to them, but those limits are relatively high.
Unlike some tax-advantaged accounts, which offer limited menus of specified choices, with an IRA, you can generally invest in almost any type of asset, with only a few limitations that are intended to prevent things like self-dealing. Moreover, you don't need your employer's help to set up an IRA -- just about any financial institution will do it.
The latest news on IRAs
The recently passed SECURE Act made a couple of changes to the rules for IRAs that could enhance the usefulness of those accounts for some savers.
First, the new law pushes the back the age at which IRA holders must start taking required minimum distributions from 70 1/2 to 72. That gives you an extra year and a half to let your account balance build up.
Also, previously, people could no longer contribute to Traditional IRAs after they turned 70 1/2. That age limit has been eliminated, so if you're still working, you can still add money to your account, regardless of how old you are.
The most important thing to remember about IRAs
The key to understanding the role IRAs should play in your overall financial plan is to remember that their name isn't meaningless. Individual retirement accounts are primarily tools for preparing for retirement. If you cash in an IRA early, you'll have to pay a 10% penalty if you're not yet 59 1/2 years old, and you'll also have to pay taxes on any Traditional IRA distributions, as well as on any income from a Roth IRA that you withdraw.
For many people, though, the discipline required to make regular retirement contributions is exactly what they need. So if you didn't save enough last year, you'll particularly appreciate the ability to make IRA contributions that count for the 2019 tax year until April 15, 2020 -- and you can make a 2020 contribution at the same time. That ability to catch up if you procrastinated last year makes now a great time to give your retirement savings a boost.