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When Should You Start an IRA?

Author Bio
Steven Neeley, CFP®

is a retirement planning expert and financial advisor with Fortress Capital Advisors, a fee-only, fiduciary registered investment advisor offering retirement planning and wealth management services in the State of Indiana and other jurisdictions where registered or exempted. Main office: 418 Oak Dr., Carmel, IN 46032. Tel: (317) 210-3727.

Steven Neeley, CFP®

is a retirement planning expert and financial advisor with Fortress Capital Advisors, a fee-only, fiduciary registered investment advisor offering retirement planning and wealth management services in the State of Indiana and other jurisdictions where registered or exempted. Main office: 418 Oak Dr., Carmel, IN 46032. Tel: (317) 210-3727.

Table of Contents

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Introduction

IRAs are one of the most powerful tools available for securing a financially stable future. Yet many individuals hesitate to start one, either because they’re unsure of its benefits or they don’t think it’s the right time. In this article, we’ll dive into what an IRA is, how it works, and why starting one sooner rather than later is usually a wise financial decision.

What is an IRA?

IRA stands for Individual Retirement Arrangement, though many people mistakenly believe it stands for Individual Retirement Account. 

An IRA is a tax-advantaged savings account designed to help you save for retirement. Unlike a standard savings account, an IRA offers significant tax benefits that can aid in the accumulation of wealth over time.

How Does the IRA Work?

When you open an IRA, you’re essentially creating a financial bucket reserved for your
retirement. You can fill this bucket with a variety of investment options, such as stocks, bonds, and mutual funds. You can even put real estate or gold in an IRA if you follow special rules.

Depending on the type of IRA you choose, your contributions may be tax-deductible, and your investments can grow tax-deferred or even tax-free.

Types of IRAs

There are several types of IRAs, each with its own rules and benefits:

1. Traditional IRA: Contributions may be tax-deductible, and investments grow tax-deferred until withdrawal.

2. Roth IRA: Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.

3. SEP IRA: Designed for self-employed individuals and small business owners.

4. SIMPLE IRA: Similar to a SEP IRA, but allows for employee contributions as well.

5. Spousal IRA: For non-working spouses, this type allows a working spouse to make
contributions on behalf of a non-working partner.

When Should You Start an IRA?

The short answer is: as soon as you’re eligible. The power of compound interest means that the earlier you start contributing, the more time your money has to grow. Even if you can only contribute a small amount initially, that sum could multiply significantly over several decades.

Keep in mind, however, if you have limited funds to contribute toward retirement and you are eligible to participate in an employer sponsored retirement plan such as a 401(k), you may be better off contributing to that over an IRA, especially to the extent that the 401(k) offers a match to contributions. As always, you will want to consult a tax professional or financial advisor regarding your specific situation.

Why Invest in an IRA?

1. Tax Advantages: Depending on the type of IRA, you can enjoy tax deductions on
contributions or tax-free growth.

2. Compound Interest: The longer your money is invested, the more it grows.

3. Diverse Investment Options: From equities to bonds, you have a wide range of investment choices.

4. Financial Security: Having a dedicated retirement account helps ensure that you’re financially prepared for your later years.

FAQ’s & Conclusion

Yes, you can contribute to both, but there are some things you need to know. As of 2023, the annual limit for contributing to a 401(k) was $22,500, or $30,000 if you're 50 or older. For an IRA, the limit was $6,500 per year, or $7,500 if you're 50 or older. These limits are totally separate; contributing to one doesn't affect how much you can put into the other. But wait, there's more! If you're contributing to a 401(k) through your job and you also make enough money to exceed certain income thresholds, the amount you can deduct from your Traditional IRA contributions might be limited. So yeah, you can double-dip, but there's a little bit of fine print. It’s always best to consult a tax advisor to get the most current and personalized advice!
Pulling out your money before you turn 59½ usually means you’ll pay a penalty. In most cases, you'll owe a 10% early withdrawal penalty on the amount you take out. On top of that, if you have a Traditional IRA, you'll also have to pay income taxes on the withdrawn amount because, remember, you put that money in tax-free. Roth IRAs are a bit more forgiving; you can usually withdraw contributions (but not earnings) without penalties. However, taking out earnings early from a Roth IRA will likely subject you to the same taxes and penalties as a Traditional IRA. Long story short, talk to a financial advisor before you crack open that piggy bank.
The answer is a little different depending on what type of IRA you've got. As of 2023, the annual limit for both Traditional and Roth IRAs was $6,500, or $7,500 if you’re 50 or older. For SEP IRAs, the limit was a whopping 25% of your income or $66,000, whichever was lower. SIMPLE IRAs had a limit of $15,500 or $19,000 if you’re 50 or older. Now, keep in mind these numbers change due to inflation and IRS whims, so it's wise to keep an eye on the IRS website.
While an IRA in and of itself wouldn’t cause you to lose money since it’s simply a type of investment account, you can definitely lose money in an IRA depending on how you choose to invest. Diversification and long-term planning are key.

Conclusion

Starting an IRA is a wise financial move for almost anyone looking to prepare for retirement. The tax benefits, along with the potential for compound interest, make it an ideal vehicle for long-term wealth accumulation. Although the specifics of when to start an IRA may depend on your individual circumstances, the general rule is that the sooner you start, the better off you’ll be. Consult a financial advisor for personalized advice tailored to your financial situation.

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Legal Disclosure

This article is for informational purposes only and is not intended to provide, and should not be relied upon for investment, financial, legal, or tax advice. The content is general in nature and does not take into account your specific investment objectives, financial situation, or particular needs. Any information or opinions contained herein are not intended to constitute a solicitation or offer to buy or sell any securities or other financial instruments. Past performance is not indicative of future results.

The author of this article is a Registered Investment Advisor. However, this article does not constitute an offer to provide personal investment advice. The views expressed in this article are the author’s own and do not necessarily reflect the views of any advisory firm with which the author may be associated. It is crucial to consult with your own qualified financial advisor, tax advisor, or legal counsel before taking any action based on the information provided herein. Investing in financial instruments involves a high degree of risk and may not be suitable for all investors. Before making any investment decisions, prospective investors should carefully consider their investment objectives, level of experience, and risk appetite.

The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with investing in financial instruments and seek advice from an independent financial advisor if you have any doubts.

The author has taken reasonable precautions to ensure the accuracy of the information contained within this article. However, the author, advisors, agents, and any affiliated parties make no representations or warranties as to the accuracy, completeness, or suitability of this information for any purpose, and disclaim all liability for the use of this information for any purpose.

Nothing in this article should be considered a solicitation or offer to buy or sell any specific products or securities. Furthermore, this article should not be considered as an endorsement or recommendation of any companies, products, or services mentioned within.

Remember, investing in private placements and other similar investments involves significant risks, which include, but are not limited to, illiquidity, lack of dividends, loss of investment, and dilution, and it should only be done as part of a diversified portfolio. Your capital is at risk.

Always conduct your own due diligence before making investments.

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