Are misunderstandings about IRA accounts keeping you from financial security? Money Girl covers 3 of the most common mistakes that may be preventing you from using IRAs to build wealth.
One of the best ways to save for retirement is to make regular contributions to an Individual Retirement Arrangement or IRA. Although these special, tax-advantaged accounts are available to just about every American with income (including non-earning spouses), many are passing them up.
Some simple misunderstandings about how IRAs work may be keeping you from shoring up your financial security. In this episode, I’ll tackle 3 common mistakes you should be aware of, so you can use IRAs to successfully build wealth. .
Recently, I was invited to make a speaking appearance at the University of North Georgia on the topic of creating financial independence. During my Q&A session, it was clear that many students were anxious to start building wealth—but some were also hesitant.
Fortunately, their concerns revealed misunderstandings about the rules for using an IRA. Of course, I was thrilled to clear up those misconceptions, and put their minds at ease about getting started.
Today, I want to bust through those misunderstanding for Money Girl readers and podcast listeners, as well. Investing through a retirement account is just too good an opportunity to miss!
What Is an Individual Retirement Arrangement (IRA)?
In a nutshell, an IRA is a type of account that allows you to make tax-advantaged investments for retirement. That means owning investments within an IRA saves you money on income taxes and capital gains taxes, and ultimately allows you to save more for the future.
Any time you have an opportunity to delay taxes or eliminate them altogether using a tax-advantaged account, please take advantage of it! Otherwise, you’re giving away money to the government for no good reason, instead of keeping it for yourself and your family.
For 2014 and 2015, the annual contribution limit for all your IRAs is $5,500. If you’re age 50 or older, you qualify for an additional catch up contribution of $1,000, for a total allowable limit of $6,500 per year.
Here are 3 common mistakes that should never keep you from building wealth with an IRA:
Mistake #1: Believing Contributions Are Required
In other words, you could open up an IRA and then never contribute another penny, if you like. There’s no rule that requires you to add money to the account every year to keep it open, or to qualify for tax advantages.
With an IRA, there may be some minimum amount needed to open your account, such as $50 or $100. But many investing services like Betterment, Motif, and E*TRADE have no annual fees or account minimums.
So in theory, you could make a small, one-time contribution and let it grow forever. Let’s say you invested just $100 in an IRA earning an average annual return of 7%. If you never made any additional contributions, your $100 would grow to a balance close to $1,500 over a 40-year time period.