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If you want to be rich, you need to start investing. The best way to invest your savings is to use the tax-advantaged accounts the federal government makes available, because by doing so, you can save thousands in taxes both now and in the future.
Each year, anyone who has earned income from a job, business, or side work can set money aside for retirement in an IRA. Unlike most tax breaks that are only available until the end of the tax year, you have until the regular tax filing deadline -- this year, April 17 -- to put money into an IRA and have it count on your 2017 tax return. That's just 100 days away from the date of this article. Here's your step-by-step guide to help you figure out how much to contribute, which IRA is best for you, and other vital information.
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There are two types of IRAs: Roth IRAs and traditional IRAs. Most people choose traditional IRAs because they can often get an immediate tax deduction on their current-year return, which results in a bigger refund or smaller tax bill right now. You also get the benefit of tax deferral during the period that your money remains in a traditional IRA, but you'll have to pay taxes on your withdrawals in retirement. Roth IRAs don't give you an immediate tax deduction, but you don't have to pay tax on retirement withdrawals as long as you meet the requirements for the account.
Anyone can open a traditional IRA, but income limits apply above which you might not be able to make a Roth contribution. In addition, not all traditional IRA contributions are deductible if your income exceeds other limits. For the 2017 tax year, here's more information on the income limits both for Roth IRA contributions and for deducting traditional IRA contributions.
It's easy to open an IRA. Nearly all banks, brokerage companies, mutual fund companies, and other financial institutions make IRAs available to clients. The most important thing is to make sure that whichever place you pick offers the investments you want in your retirement portfolio.
For maximum flexibility, online brokerage companies can be your best bet. You'll typically have exposure to stocks, bonds, mutual funds, and exchange-traded funds through a broker, and online discounters typically offer cheap commissions. By contrast, some banks only offer low-rate CDs, and insurance companies will often push you toward annuities or other insurance products that aren't always well-suited for your needs.
One reason why it's smart not to wait until the last minute to do an IRA contribution is that it takes time to get your account set up. Even though many financial institutions have online application processes that can make it far easier to open an account than it was in the past, there are still regulatory requirements that force banks and brokerage companies to verify your identity and take other steps to ensure the security of your account. You don't want to leave yourself with too little time to gather the required information. 100 days is plenty, and it gives you a nice cushion if other priorities get in the way.
If you want to max out your IRA for the 2017 tax year -- and if none of the income limits above apply to the type of IRA you want -- then you'll need to contribute $5,500 if you're less than 50 years old, or $6,500 if you've already reached your 50th birthday. If your earned income from a job or other work is less than that, then you can only contribute what you earned.
Just because you can contribute the maximum doesn't mean that you have to. Most financial institutions will take smaller contributions, and if you commit to regular investments on a monthly or quarterly basis, then you can find companies that will let you contribute in very manageable increments of as little as $100.
Once you've completed all the paperwork and have the money ready, you'll need to make your actual contribution. For your 2017 tax return, you'll need to complete your contribution by April 17, 2018. You can also start making 2018 contributions if you've already maxed out what's allowed for 2017.
April might seem far away, but 100 days can go by faster than you'd think. By opening an IRA earlier rather than later, you'll be that much closer to securing your retirement finances.