It's easy to put off saving for retirement since there are so many other day-to-day expenses competing for your money. But starting with just small regular savings will put you on the road to a more secure retirement.
While there is no rule saying you have to save in a designated retirement account, there are advantages to doing so. And setting up an individual retirement account (IRA) is just as easy as opening any other financial account.
Most banks offer IRAs and so do investment firms. So the first decision is where you want to keep your money and what kind of investments you want in your retirement portfolio.
The second decision is choosing what kind of IRA – traditional or Roth. Vanguard has a handy comparison guide that can help you decide. Here are the major points:
Contributions to a traditional IRA are tax deductible, but contributions to a Roth IRA are not. However, the decision might not be as simple as it sounds.
When IRAs were authorized, it was assumed that consumers needed tax deductions while they were young and in their peak earning years. So contributions to a traditional IRA are deductible and there is no tax on the money's growth, as long as it stays in the account.
But at age 70 and one-half, you must begin withdrawing the money and paying taxes on it as ordinary income. If you are in a lower tax bracket during retirement, maybe you will come out ahead. But many Baby Boomers are finding they are quite wealthy in retirement, and those IRA distributions can be costly at tax time.
With a Roth IRA, you can't write off contributions but you don't pay taxes on the investments' appreciation. If you are in a higher tax bracket when you start withdrawing the money, it doesn't add to your tax bill. Many financial advisers favor the Roth for that reason.
Things that are the same
Some other things about traditional and Roth IRAs are the same. People under 50 can contribute up to $5,500 per year. People over 50 can contribute up to $6,500 per year.
With a Roth IRA, you can keep making contributions as long as you want. With a traditional IRA, you can't make additional contributions after age 70 and one-half.
Once you've decided whether to go traditional or Roth – and you should probably discuss it with a financial adviser before deciding – you need to determine where the account will reside. Just because you open it at one financial institution, it doesn't mean it has to stay there. You can “roll over” one account into another IRA without penalty, as long as you follow the rules.
To open an account, it's simply a matter of filing out the proper forms and making the initial deposit. After that, you need to decide what type of investments make the most sense for your future. You can invest in stocks and bonds, as well as real estate and gold. There are a wide range of options, so it makes sense to get good advice as you start your retirement savings plan.