Saving for Retirement: The Traditional IRA

Today, I will go over the Traditional Investment Retirement Account (IRA).  Yay!

The Traditional IRA: This account, like the Roth IRA, is an account that you can open up with most banks.  (Remember that a 401K is one that is opened up through your workplace.)  Banks will likely give you a bunch of investment options, ranging from CDs to money markets to mutual funds to stocks and bonds, and you can choose what you'd like to invest in based on your own preferences of risk and return.  The IRA is kind of a blend of the 401K and the Roth, and I'll explain why.

Pros: Like the 401K, your contributions are deductible.  That means you can adjust your income to deduct any contributions to your IRA, which will reduce your taxes.  Because your money is growing tax deferred, this means that the gains on your account will be larger.  Unlike the Roth, there are no income eligibility requirements, so if you're making $50K a year or $250K a year, you'll be able to contribute to the IRA as long as you're under 70 1/2 (don't ask me why they make up these weird age limits).  The max amount you can contribute during 2014 is the same as the Roth - $5,500 a year.

Cons: Because you are deducting your contributions (AKA not paying taxes on the money when you initially put it into the IRA), you will be paying taxes on it when you start to pull the money out.  Another requirement of the IRA is that you will be mandated to take money out once you turn 70 1/2, whereas with a Roth you're not required to do that. Consistent with the other retirement accounts, you will be hit with a 10% penalty fee if you start taking money out before 59 1/2, unless you meet one of the exceptions.

I know saving for retirement seems like a long, long way off, but it is really essential to start saving for it, especially when you're young.  The difference between starting a retirement account when you're 23 vs. 33 is huge. Like really, really huge. Some people think, "Oh, I'm still young, I'll start it when I'm 33 because I'll be able to contribute a lot more." What I say to those people is, "You are likely wrong."  Even if you're contributing a lot more when you're 33, the amount you can compound in 10 years with a smaller amount of money will likely be bigger.  My advice to you all is to open one up as soon as you can, even if you know you'll be putting just a little bit in each month.  I put aside 10% of my paycheck into my 401K.  I could decide later to put some into a Roth and some into an IRA, but this is just works for me at this stage of my life.  It's totally all personal preference, and there is no right or wrong retirement account to invest in or right or wrong amount to contribute, but something is better than nothing.

Happy saving!

Ali