Decoding IRAs – How to Start Saving for Retirement

personal finances | November 28, 2016 | By Susannah McQuitty

A hiker hangs her feet over the side of a rock overlooking the Blue Ridge mountains.

Yeah, yeah, yeah – save for retirement, get a head start, invest now. You’ve heard it all before. The problem is that it’s not easy to save toward something so far in the future, especially when you’re not exactly raking in money right now.

I get it. Saving money is hard (even the change I toss into my old university mug usually doesn’t last long), but there are several awesome options out there for retirement savings to not only get you started, but also to tailor-fit a plan to your needs.

Let’s talk Individual Retirement Arrangements, or IRAs – specifically traditional IRAs, Roth IRAs, and MyRAs.

Sunbeams glide through the Blue Ridge mountains from an overlook.

Traditional IRAs

Why not start with the basics? You’ve probably heard of traditional IRAs as retirement savings accounts, but it’s better to describe all kinds of IRAs as a lockbox that holds investments. When you open an IRA, you’re protecting your stocks, mutual funds, bonds, or index funds in a safe space that is designed specifically for retirement savings – and that includes tax benefits.

A traditional IRA puts the tax benefits on the front end of the account. When you start putting money in a traditional IRA, you don’t have to pay taxes on your contributions or earnings until you take the money out to retire.

Roth IRAs

With Roth IRAs, you pay taxes on the front end when you make contributions. That means that you’ll get everything you’ve saved – including earnings – tax-free when you withdraw your funds during retirement. Roth IRAs are great if you plan on having a higher income by the time you retire, since you’ll be in a higher tax bracket. (For more info, check out our blog post on tax brackets).

Red autumn leaves stain the Blue Ridge mountains red during the golden hour.

MyRAs

The whole investment part of IRAs might be a bit intimidating; that’s why myRAs help you get on your feet before you dive into the world of stocks and bonds. A myRA is a type of Roth IRA savings account, but the difference is that the money you put into a myRA is backed by the United States Treasury, so it’s not a risky investment. There’s no minimum starting amount or contributions – just pay what you can afford, when you can afford it, up to $5,500 per year (which comes to about $460 per month). A myRA is yours, independent of any third party, so it’ll also follow you from job to job. Oh, and you don’t have to worry about any penalties for withdrawing early.

After you save $15,000 or reach the 30-year mark (whichever comes first), you’ll have to transfer the money to a private Roth IRA.

A mountain road winds through autumn trees in a North Carolina forest.

So which IRA is the best?

That depends on your preference and personal financial situation. Do a little digging: Your findings will be well worth the effort! You might also be able to claim the Saver’s Credit, which means you can trim some dollars off your tax bill when you file your taxes. Honestly, why wouldn’t you start saving now?

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