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.
But if your tax rate is likely to be lower during retirement, using a traditional IRA allows you to get a tax break now, when your tax rate is higher. If you have no idea about what might happen in the future, hedge your bets by contributing to both.
If you’re eligible for a Roth IRA, you can divide contributions between it and a traditional IRA in any amounts - as long as you don’t exceed the annual limit (including the catch up contribution.) For instance, if you’re younger than 50, you could put $3,000 in your Roth and $2,500 in your traditional IRA.
Mistake #3: Confusing an IRA with an Investment
The third mistake is thinking that an IRA itself is a kind of investment. Remember that a retirement account is simply a place to put your investments.
Imagine a basket full of apples and oranges. The basket is the IRA, and the apples and oranges are the different investments you hold inside it.
You can own a wide variety of investments and savings vehicles in an IRA, such as individual stocks and bonds, mutual funds, exchange-traded funds (ETFs), certificates of deposit (CD), and money market accounts.
The IRS does prohibit you from owning some kinds of investments in an IRA, such as life insurance, collectibles, and certain types of personal property.
Should You Save for Retirement Using an IRA?
The only downside to saving for retirement using an IRA is that there may be a penalty if you take money out before reaching age 59½. So never invest money in a retirement account that you might need to spend before then.
If any of 3 misconceptions I’ve covered are the reason why you don’t have an IRA, it’s time to start investing for your retirement and building wealth today.
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