3 Little-Known Perks of Investing in an IRA

There are more reasons to use an IRA than you might think.

There are a few characteristics of individual retirement accounts, or IRAs, that are common knowledge. Many people know that these are places where you can save money and invest it for retirement, and it's also well known that some IRA contributions can be tax deductible.

However, there are some features and perks of IRA investing that many people aren't aware of. Here are three of the most interesting perks of opening and investing in an IRA that you might not know yet.

1. You can contribute to an IRA even after the end of the year

For 2022, you can contribute as much as $6,000 to your IRA, or $7,000 if you're 50 or older. Being that it's October already, if you are just getting started, it might seem intimidating to try to max out your contribution (and your potential tax breaks) in just a few months.

However, it's important to note that you have until the tax deadline to make your contributions. That means your 2022 contributions can be made anytime until April 15, 2023. You can open an IRA right now and have more than six months to get your 2022 contributions into your account -- a far more reasonable timeframe for many people.

2. There are several ways to use your IRA funds early

You typically cannot withdraw money from your retirement plan penalty-free until you reach 59 and ½ years of age. And this is certainly true when it comes to IRAs. But you might not be aware that IRAs have a few special rules that might allow you to use your money early.

For starters, you are allowed to make a one-time $10,000 withdrawal from your IRA to help pay for a first-time home purchase. It doesn't even have to be your home -- if you want to help your child buy their first house, for example, you can use money from your IRA to do so.

You're also allowed to withdraw any amount from your IRA without penalty to help pay for college expenses. In fact, many people who already have retirement plans at work open IRAs specifically for this purpose. The tax benefits are similar to 529 Savings Plans (especially if you use a Roth IRA), but there's the added flexibility to simply use the money for your own retirement if your child doesn't need it all.

It's also worth noting that these early withdrawal exemptions are exclusive to IRAs. Qualified retirement plans like 401(k), 403(b), and 457 accounts don't have these. And while these withdrawals are penalty free, withdrawals for first-time home purchases and college expenses from traditional IRAs are considered taxable income.

Roth accounts also get a special early withdrawal privilege. Account owners are allowed to withdraw their Roth contributions, but not any investment profits, at any time and for any reason.

3. You might be able to get another tax break

Technically speaking, this applies to any type of retirement account, but if you don't have a retirement plan through your job, you may not be aware of it.

It's well-known that contributions to a traditional IRA can be tax deductible, and that Roth IRA withdrawals can be tax-free. But there's another tax benefit called the Retirement Savings Contribution Credit (informally known as the Saver's Credit) that many people aren't familiar with.

You can read a thorough discussion of the credit if you're interested, but the short version is that the Saver's Credit is an income-based tax benefit that essentially can give you up to $2,000 in free money to reward you for investing for retirement. For 2022, married couples with adjusted gross income (AGI) up to $68,000 can qualify, and for single filers, the maximum is $34,000.

IRAs can be great financial tools

The bottom line is that IRAs aren't just great ways to save money and build wealth over time. They can provide some excellent tax advantages (especially if you have a low- to middle income), they have flexible contribution timelines that let you maximize your savings, and the money in your account might be more flexible than you thought.