Considering opening up an individual retirement account (IRA)? First, you’ll need to know the basics. Then, you can choose which company is a match for you. Andrew Guidice, an investment advisor in New York City answers essential questions about how to begin the process.
Q: What is the difference between a traditional IRA and Roth IRA?
A: Traditional IRA contributions (what you put in) are tax deductible and commonly known as “write-offs” on both state and federal tax returns for the year you make the contribution. Withdrawals in retirement are taxed as ordinary income tax rates. The thing to note is that the IRS always gets paid, either today or 40 years from now. Advocates of traditional IRAs say the $30 will grow quicker than the $19.50, which is true. They also say that once you’re 70 years old, your tax bracket won’t be 35 percent and more like 25 percent since elderly people aren’t making as much money as 30-year-olds.
Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. Advocates of Roth IRAs say taxes are likely going to be higher in 40 years and they rather pay the tax today.
Q: Is there a good or bad time to start an IRA?
A: The sooner the better so the investments can grow. You have up until tax day (usually April 15) the following year to contribute for the prior year.
Q: How much of my paycheck do I have to set aside to put into my IRA? Does it vary from policy to policy?
A: You can contribute a maximum of $5,500 a year to a Roth or traditional IRA. If you get paid twice a month, you could put $200 a paycheck, which will get you to about $5,000 for the year. Then there are 401ks, which are offered through employers and very similar to IRAs but their annual limits are higher.
Q: Should I still continue to save money elsewhere?
A: A good rule of thumb is to keep at least three to six months of your expenses in your checking/savings account. This “liquid” money will ensure that if you lose your job, you’d be covered for a few months until you get another job.
Q: Can I change the amount of money I choose to put into the IRA at any given time?
A: Yes it’s flexible, keeping in mind that you’re limited to $5,500 for an IRA, and $18,000 for a 401k.
Q: What companies are best to go with?
A: It’s best to work with a bank or online bank you already have some sort of relationship with.