WISER’s Financial Literacy Series: I’m Ready to Save, Now What? – IRAs

Whether you have $25 or $2,500 to spare, there are smart ways to invest your money to build your retirement savings. WISER is highlighting different strategies for saving, depending on your financial situation, age and personal feelings about risk taking. Use this brief to brush up on your financial knowledge to make the most of your money.

Investigating IRAs:

If your employer does not offer a pension plan or 401(k) type plan, it is especially important that you save for retirement in other ways. One good option is to open an Individual Retirement Account (a.k.a. IRA).

There are two main types of IRA’s: Traditional IRAs and Roth IRAs which provide straightforward avenues through which to save money long-term.  You can open an IRA at many financial institutions, including banks, mutual fund companies and brokerage firms.  Look for a large, “no-load” mutual fund company, which means that it will not charge commission for services. You can ask for free information on IRA’s from your financial institution of choice to help you choose which IRA fits your unique situation.  Here are some basics to get you started on your decision:

IRA Basics

When you open a Traditional or Roth IRA, you choose the combination of investments you want to incorporate from a menu of stocks, mutual funds, CD’s, money market investments etc. In 2011, you can contribute up to $5,500 to your IRA; $6,500 if you are 50 years or older. Keep in mind that you can contribute less than the maximum amount also, every bit helps. The contribution year for your IRA starts on January 2 and ends on April 15 of the next year.

In general, you will be penalized if you withdraw from your IRA before you reach 59 ½ years of age.  A few exceptions to this rule include: withdrawals for college tuition, certain medical expenses and first time home purchases.

Traditional vs. Roth IRA- What You Need to Know:

A significant difference between Traditional and Roth IRAs is how they deal with taxes.  The funds you contribute to your Traditional IRA are tax-deferred, so you pay nothing now but must pay taxes when you withdraw money at retirement. Conversely, you must pay taxes on your Roth IRA contributions, but when you withdraw funds, you can do so tax free.

A potential perk of having a Roth IRA is that you are not forced to take minimum distributions in retirement; you can leave it untouched if you prefer.  This is important to note because your IRA tax benefits can continue even after you die for the person that inherits your IRA. (**This is the person you name as your beneficiary in the adoption agreement when you first open your IRA.)


Check out WISER’s Fact Sheets on Traditional IRAs and Roth IRAs for specific information on contribution and deduction income limits.

IRAs are an important piece of retirement security, especially if you do not have access to an employer-sponsored retirement plan.  Make sure to consider your financial situation and speak with someone at your preferred financial institution about using an IRA to invest in your retirement.

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