What is an IRA
IRA stands for Individual Retirement Account. The best thing about this account is that it allows you to invest in the market while avoiding good ol’ Uncle Sam on your capital gains (the money you make from investing).
One sad thing about the IRAs is that they have a contribution limit of $5,500 annually (or $6,500 if you are over the age of 50). No matter what age, you should make it a goal to max out your IRA each year.
Anyone can open an IRA and contribute to the account as long as you are working and you file your taxes. Another way to contribute to an IRA is if you have a working spouse and the household’s taxes are filed jointly. This is how I’m contributing to my Roth IRA because I have a wonderful working wife and we file our taxes jointly.
Traditional vs Roth
Your contributions to a Traditional IRA are pre-tax and are possibly deductible from your annual income. Meaning if you were in a higher tax bracket you could be bumped down by putting that money into a Traditional IRA. This will save you on taxes initially but not when you withdraw them in retirement.
The earnings in the account will grow tax-deferred until, like I mentioned before, you withdraw them during retirement.
Downside, because you avoided all those taxes up front while making contributions you now have to pay them during retirement. A traditional IRA might be a good idea if you plan on being in a lower tax bracket during retirement.
The money you contribute to a Roth IRA is money you have already paid taxes on (after-tax). Your earnings in the account will grow tax-free and the withdraws you make during retirement will also be tax-deferred.
A really cool thing about the Roth IRA is that during retirement years when you withdraw that money from your account, it won’t count toward your income. This means that you can remain in a lower tax bracket during retirement while withdrawing more. Which is awesome. Paying fewer taxes is awesome.
Another perk about a Roth is you can withdraw your contributions ( at any moment without penalty since taxes were paid on them before the deposit. However, if you withdraw your earnings before 59½ there will be penalties. There are exceptions to the penalties such as making a down payment for your first house (I believe up to 10k), paying for education or paying for medical bills from an accident that has left you disabled.
The downside is that there is an income limit that will prevent you from contributing to a Roth IRA, which is, if you make more than $118,000 individually or $186,000 jointly (as of the year 2017). And going into the profession we are choosing, the chances are EXTREMELY high that you will be making more than $118,000… I mean I really do hope you are making more than $118,000 annually.
Wait a minute, does that means I won’t be able to contribute to my Roth IRA later on? Don’t you fret! There is a way around this, there is a backdoor to contribute to your Roth IRA. The Backdoor IRA allows you to contribute to a Roth even if you make more than the income limit. And it is completely legal! … I believe.
Why You Need An IRA
Do you plan on retiring? Or do you just want to work less? To go from 5 work days a week to 4, 3 or 2? Then you need an IRA. Simply putting your money into a savings account with a 0.07% annual percentage yield (APY) will not allow you to get to this point.
Contributing to your 401k, 403(b), a personal pension plan is great, but probably won’t cut it. Chances are very high that you will need another type of investing account for retirement.
The reason why these tax-advantageous accounts are so important is just that. You are not taxed on your gains. Taxes will take away a lot from you and you need to take advantage of every tax-deferred account possible.
Also, I don’t remember where I heard this, but if your money isn’t working for you, you will never be able to retire. And what better place to have your money work, than a tax advantageous account?
The Earlier The Better
Just the other day I mentioned that I have a Roth IRA with one of the Dentists at my school and he said “Wow, you already have an IRA? Well, you are ahead of the game!”
Yes yes yes! You want to be well ahead of the game. It shouldn’t be a shocker to others either that I have planned for retirement. I wish everyone was ahead of the game and you should want to be ahead of the game also. Who doesn’t want a little advantage over life?
“If you started at 20, contributing every year … and then you stopped at age 30, at 60 you would have more money than someone who started at 30 and contributed regularly for 30 years.”-Hopwood
Should I Be Investing In An IRA Even During School?
If you have a sugar momma/daddy or you have some source of a side income (and you file your taxes on that income) then Yes! I think you should be contributing to retirement funds even while in school.
“But we are at the peak of a bull market. If I buy now, my assets are going to decrease in value! I should wait.” No, No you should not wait, if you are going to invest, the best time to do it is now! Even if we are in “peak” of the bull market. Here,lemme give you a little hint, you can’t time the freaking market.
No one can.
If they say they can, then they are liars and shouldn’t be listened to. We might be near the peak or we might not be anywhere near the peak. Who knows. But if you are really anxious about it then hedge your way in… don’t put all your money in at one moment, spread it out over the year, make monthly deposits.
My point is, you’re not in this for the short run, you are in this for the long haul. Like 30 years long haul. Your investments will increase over a 30 year period even if we experience a market drop in the next 2 years.
Also, check out this chart I threw together. This is over a 35 year period with an annual compound interest of 7%
If you deposit just $5,500 there is a potential for that money to grow to be about $55,000 in 35 years. This is just depositing the money and not adding an annual contribution to it. Now, check out if we do an annual contribution of $5,500 every year for 35 years. Starting with $5,500.
Roughly $760,00 over 35 years! You only contributed $192,500… that is $567,500 earnings from your investments. That is 567k that you did not have to work for! The money did the work.
The sooner you start, the larger your returns will be down the road. This is something you do not want to procrastinate. You can not play catch up with the years of compounding interest that you have missed out on. Start now even if your contributions seem minuscule, it will be worth it.
Someone’s sitting in the shade today because someone planted a tree a long time ago.– Wararen Buffett
Start growing that tree today. The best time to do it is today not tomorrow, not next week but today.
Open an account with Fidelity or with Vanguard they have the lowest fees (having low fees are extremely important). Open up a Roth IRA with one of these guys and invest in a total market index fund or pay a little extra for their advice on what to invest in (it is worth it). It really is simple, it’s not complex, it will be worth your time and effort to open an IRA.
[I do not receive anything if you sign up for Fidelity or Vanguard through the links provided. I am not affiliated with them in any way.]