Should I Prioritize Investing in an IRA?
What is the best type of account to be sure you have the financial support you need in retirement? Selecting a retirement strategy affects the return on your investment and the overall cash flow that will be available in the future.
Many people participate in 401(k) retirement plans offered through their employers. Such plans have many positive characteristics, most notably that of tax-deferred growth, as well as potentially matching contributions that an employee makes.
Besides a 401(k) plan, an Individual Retirement Account (IRA) is a highly-effective way to provide the financial resources needed later in life. With the right investing strategy, you can build a healthy nest-egg to support your desired lifestyle down the road.
Five Reasons to Invest in IRAs
IRAs have several redeeming qualities which make them particularly good investment vehicles. Here are some of the benefits you will enjoy when choosing an IRA for your retirement savings:
1. IRAs are Easy and Accessible
- Opening an IRA is easy. As long as you earn taxable income, you qualify to use an IRA to save for retirement. The simplest solution is to open an IRA through a brokerage firm or bank, often with same-day services available.
- Once the account is open, you can work with an investing expert to dial in the strategy and optimize your long-term savings. It’s simple to manage your account with professional and automated services to give you a hands-off experience.
2. Tax-Advantaged Features
- How much of your hard-earned money are you paying in taxes? For some people, it feels like a challenge to maximize their IRA investments when the IRS is taking a portion of their investment money.
- The ability to take advantage of features specific to IRAs makes their appeal readily apparent to the tax-aware investor.
3. Investment Compounding
- The advantage of a tax-advantaged account is that you can invest more upfront, helping to build your savings more quickly. Over time, the investment account earnings are reinvested in the account, helping to generate more money.
- This strategy gives you a bigger long-term payout when you are ready to start living off the retirement savings. The compound effect can add up over the years, making it a great investment strategy to stretch your dollars after you stop working.
4. A Wide Variety of Investments
- As mentioned earlier, many people have 401(k) accounts, which are an excellent vehicles for saving for retirement via tax-deferred contributions.
- With this said, one of the disadvantages of 401(k) plans is that the investment options are often limited to a couple dozen or so choices. An IRA, on the other hand, is typically opened with a custodian (e.g., a brokerage firm providing trading and ) who provides access to typically thousands of investments on its platform.
- In an IRA, unique strategies can be used, with thousands of options such as exchange-traded funds (EFTs), bonds, stocks, mutual funds, and more. This range of investments puts your dollars to work more effectively, helping to reduce the investment risk while optimizing the long-term results for your contributions.
5. No Age Limits
- As long as you are working, you have the option to contribute to a traditional IRA fund. Previously, an age limitation allowed people to contribute until they were 70-1/2 years old.
- On December 20, 2019, The Secure Act was signed into law, removing this age limit. This change in the law provides a bit more flexibility for people wanting a longer-term investment strategy.
Flexible Investment Timeline
You have a bit of flexibility with the timeline for IRA contributions. These contributions are available until the annual tax deadline. For example, for the 2020 Tax Year, one can still contribute to a traditional IRA until April 15, 2021 and apply any tax benefits to 2020. (Note: For both tax years 2020 and 2021, the maximum contribution limit is $6,000 for individuals under 50 years of age, and $7,000 for individuals 50 years of age or older).
Even though 2020 is over, you still have the option to invest in an IRA if you are looking for a way to reduce the tax burden on your upcoming tax filing. Tax accountants sometimes recommend this strategy when their clients are on the threshold of a higher tax bracket.
As with any other type of tax strategy, make sure to talk to a reputable tax advisor to determine the best plan for your unique needs. The combined services from an accounting expert and an investment team can provide a streamlined way to maximize your investment returns and minimize the tax burden.
Important Things to Know About IRA Investments
As with all investments, there are pros and cons to using an IRA in your financial plan. The rules that govern different types of IRAs vary, which is why it’s essential to understand the regulations before jumping into the investment.
For example, while there is no legal minimum investment amount to open an account, there are limits to the amount of money you can invest annually. There are income limits and other factors (such as access to an employer-sponsored retirement plan) that can reduce the amount you can invest in the IRA. Depending on the amount you are planning to invest each year, you might need multiple retirement strategies to maximize the long-term results.
Also, be aware that IRAs are intended for retirement, which means that you will accrue penalties for early withdrawal. If you decide that you need these funds before the age of 59 1/2, you will need to pay taxes on the withdrawal – plus an additional 10% penalty. On the flip side, so-called “Required Minimum Distribution” rules may apply for Traditional IRA investors over 72 years of age. Failing to do so could incur a 50% penalty on the amount of the RMD.
Investing in Israel in a Tax-Advantaged manner
If you’d like to learn more about the various strategies to match your financial situation, contact our experienced team for a personalized consultation.
We offer various account options, including IRAs, to invest in diversified Israeli equities using a low-cost approach through The Jerusalem Portfolio (TJP). Please call us today to discuss your options for opening a TJP account.