Not everyone who saves for retirement has the option to fund a 401(k). If your employer doesn't offer a plan, your next best choice is an individual retirement account (IRA). And if you manage that account wisely, you'll be sitting pretty by the time your golden years roll around.
Here are a few wise moves to make with your IRA.
1. Max out your contributions
The bad news about IRAs is that their annual contribution limits are much lower than 401(k)s allow. The good news? Maxing out on a yearly basis is a more attainable goal, and one you may be more motivated to achieve.
Though the annual contribution limits for an IRA can change from year to year, for 2019, they're $6,000 for workers under 50, and $7,000 for those 50 and over. How much money might you accumulate over time by maxing out? Imagine that today's limits remain in effect for the duration of your career (although that probably won't happen). If you're 27 years old with the goal of retiring at 67, and you max out for 40 years, you'll wind up with $1.23 million if your investments generate an average annual 7% return during that time. (That's more than doable when you load up on stocks.)
2. Open a Roth
IRAs come in two main varieties: traditional and Roth. With the former, the funds you contribute go in tax-free so that you save money on taxes up front, but then withdrawals are subject to income taxes during retirement. Roth IRAs work the opposite way: You don't get an immediate tax break for putting money into an account, but your withdrawals are yours free and clear of taxes.
Opting for a Roth IRA over a traditional one is a smart move if you expect your tax bracket to be higher in retirement than it is today, or if you simply want more freedom with your money. That's because Roth IRAs don't require you to take withdrawals from your account on a yearly basis when you're older, whereas traditional IRAs impose required minimum distributions that many seniors find burdensome.
Now the one hiccup you might encounter with a Roth IRA is that higher earners are barred from contributing to one directly. In 2019, you can't fund a Roth if you earn more than $137,000 as a single tax filer, or more than $203,000 as a couple filing jointly. But if that's the case, you can fund a traditional IRA and convert it to a Roth after the fact. You'll pay taxes on the sum you move over, but then you won't have to worry about taxes later on.
3. Check up on your investments
One advantage IRAs have over 401(k)s is that they tend to offer a wider array of investment choices. Still, you'll need to review your investment mix in your IRA regularly to ensure that it's meeting your needs. The 7% return used in the example above is based on a stock-heavy investment strategy, which IRAs allow you to implement. But there are different ways to build your portfolio. You can buy individual stocks, load up on low-cost index funds, or maintain a combination of both.
Bonds should have a place in your portfolio, too, but if you're younger, it definitely pays to focus on stocks for maximum growth. Either way, keep tabs on your investments, because a fund that performs well one year might tank later.
Being smart with your IRA could set the stage for a comfortable retirement. And after putting in your time in the workforce, you deserve nothing less.
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