Investing 101: Individual Retirement Accounts

Planning for retirement can be daunting, but Individual Retirement Accounts (IRAs) can offer a flexible and tax-efficient way to save for your future. With several options available, you can choose the right IRA for your financial goals.

IRAs have been around for several decades and are a great choice for retirement savings. IRAs were originally designed for two reasons: (1) to give Americans without employer-sponsored retirement plans a tax-advantaged savings account and (2) for those with work-based plans, a complementary way to save for retirement. Later, Congress introduced Roth IRAs, which are especially popular with younger retirement savers. Roth IRA contributions are made with after-tax dollars, but earnings growth and retirement withdrawals are tax-free. There are also employer-sponsored IRAs, although these are less common than their traditional and Roth counterparts.

With a traditional IRA, contributions are tax-deductible, and earnings grow tax-deferred until withdrawal. These contributions can help reduce last year's taxes if made before the tax-filing deadline for the previous year. For example, if you want to reduce your taxes for the 2022 tax year, you may be able to make a contribution to your traditional IRA up until April 18th, 2023, and count it as a deduction on your 2022 tax return. One of the advantages of investing in an IRA is that you can potentially attain market returns, growing your resources faster than you otherwise could with a bank savings account. This is because you can invest your contributions in various assets, including mutual funds and ETFs, which have the potential for higher returns over the long term.

Households’ IRA balances tend to be higher the longer they have owned their IRAs. In 2021, households owning IRAs for less than 10 years had median IRA holdings of $26,000, while households owning IRAs for 20 years or more had median IRA holdings of $270,000.

Another benefit of IRAs is their flexibility. With a traditional IRA, you can begin making penalty-free withdrawals at age 59 ½, and must start taking required minimum distributions (RMDs) at age 72. With a Roth IRA, there are no RMDs for original account owners, and you can withdraw your contributions at any time without penalty—although earnings may be subject to taxes and penalties under some circumstances.

IRAs provide an easy way to diversify your retirement portfolio and secure your financial future. 

Policymakers and regulators continue to propose new policies that may impact retirement accounts such as IRAs. While some policies may be beneficial, others may limit your investment options and put your retirement future at risk. As an investor, it's essential to have a voice and stay informed about policies that may impact your retirement savings.

At Secure Financial Future, we believe in empowering investors to protect their retirement savings from harmful policies and regulations while supporting those that can help you on the road to financial security. We encourage you to join our action network today!