An Introduction to Investment Retirement Accounts
When many people first enter the workforce, the concept of saving for their retirement seems like a faraway idea. However, years quickly pass and retirement creeps up on us faster than we realize. For many, understanding the options that are available for retirement investing often leads to people delaying the process. One such option for people wanting to invest in their own future through retirement accounts is an Investment Retirement Account (IRA). Below, we offer a deeper look at what an IRA is and why it is a great tool for retirement investing.
What is an Investment Retirement Account?
IRAs were initially in the 1970s when the number of people investing in defined benefit pension plans was on the decline. As more and more people began to take control of their own retirement finances, the need for accounts that enable employees to more directly control their path to retirement became more prevalent.
IRAs quickly became a popular choice because they allowed individuals to take total control over building their own retirement funds. Instead of the long-established method of putting away cash in a traditional bank account, IRAs allow individuals to invest into stocks, bonds, and other asset classes.
IRAs are Easy to Set Up and Easily Accessible
Many people often ask, “Who can set up an IRA?” The answer is pretty straight forward: anyone who earns a taxable income is eligible to create an IRA. There is no age limit that restricts who can begin investing in an IRA, so your only limitation is the amount that you can invest which is determined based on your tax filing status and your amount of income. Most banks or brokerage firms can walk you through the process of opening an IRA in a matter of minutes.
You Have Control of Your Investments
IRAs were initially created to give employees more control over their own retirement accounts. For instance, 401(k) accounts allow an employee to invest a certain amount which is often matched by their employer. While these employer-sponsored accounts should definitely be used as a vehicle in one’s path to retirement security, a significant limitation of 401(k) plans is that the menu of investment options is often limited.
IRAs don’t work that way since most IRAs are established at large custodial firms, which offer thousands of investment options, from individual stocks and bonds to diversified equity mutual funds and ETFs.
If you are comfortable with evaluating the stock market and making your own decisions, an IRA allows you to invest your funds on your own. However, you can also decide to work with a financial advisor who can help you make investment choices and guide your strategy. Your control also extends to non-cash assets, which means if you have access to bonds, stocks or mutual funds, you can also invest those.
Anyone who has ever received a paystub has noticed how much money is held out of their paycheck through federal taxation or state taxes (where they are applicable). The ability to minimize taxes over one’s lifetime is a highly admirable goal.
Fortunately, the tax code provides such an ability via IRAs. There are two primary types of IRAs, the Traditional IRA, which uses (potentially) tax-deductible contributions in conjunction with a tax-deferred strategy, or the Roth IRA, which uses after-tax money today to make tax-free growth forever. (More details on the two IRAs are available at (insert link here)).
Although IRAs have various intricacies, they share one common desirable feature: They all provide the ability to invest in a Tax-Advantaged manner.
Using ETFs to Build Your Retirement Account
An Exchanged-Traded Fund, or ETF, is a type of investment fund that is similarly to a mutual fund. However, mutual funds are bought and sold based on their price at the end of the day while ETFs are exchanged during the day.
Such intra-day pricing allows for investors to diversify their investment portfolio through low-cost investing that can be bought and sold in real time. Since nearly every market sector has ETF investment opportunities, you can create a much more diverse portfolio of investment for less money than is often required for mutual fund investing.
ETF investing is also more tax efficient than mutual fund investing. ETFs only realize capital gains when an investor sells that ETF, unlike mutual funds, which typically pay capital gains at the end of each calendar year. These low-risk, tax-advantaged investments can be an integral part of your IRA.
Minimizing Market Risk
When you invest in an IRA, you will likely allocate a significant percentage of capital to the stock market. You don’t have to be a financial professional to recognize the fact that the stock market is a volatile institution that routinely goes through peaks and valleys.
However, making the decision to invest in an IRA while you are still young allows you to protect yourself against some of the unpredictability associated with stock market investing, because you have a highly-valuable asset: Time.
Young people should invest in an IRA with a long-term goal in mind. Since an IRA isn’t the money one is relying on in the present , they’re able to endure the short-term dips in the market because they’re investing in the future instead of the present.