Step Four - Start to Save! First stop, IRA.

When the high interest debt is taken care of, you can finally start to save.

What is an IRA?

IRA stands for Individual Retirement Account. It gets better treatment from the IRS: depending on what kind of IRA you have, you can skip the taxes when you're putting the money in, or taking the money out. Either way you slice it, that's a big deal.

How is it different from a 401(k)?

A 401(k) goes through your employer. They take money out of your paycheck to fund your 401(k). IRAs, on the other hand, are funded with your "out of pocket" money.

While your employer controls the investments you can chose for your 401(k), you have a lot more control over how you invest in your IRA!

Fidelity and Vanguard have great low-fee investments, so if you don't know where to start, I recommend them. Personally, I have a Fidelity IRA and it's awesome.

What are the different types?

A Traditional IRA gets taxed when you pull the money out, but it's made out of tax-free money when you put it in. When you write a check, you're writing that check with after-tax dollars, so the IRS gives you a deduction for the amount you put in- thus reducing this year's taxes!

Note that if your income is high, you might not qualify for the deduction.

As of right now, you can put up to $5500 into a traditional IRA if you qualify. If you worked (self employed included) and you're under 70.5 years old, you can open a traditional IRA. For more advanced information, check out this Investopedia article.

If you go with a Roth IRA, the money you put in has already been taxed, but it will never be taxed again. When you retire you can take the money out tax-free. People at lower incomes tend to like this one better, because they are guessing that their tax rate now will be lower than their tax rate when they retire.

You can have both a Roth and a Traditional IRA, but you can't contribute more than $5500/yr between the both of them.

When I set up my IRA, I literally just walked into a Fidelity branch and told them I wanted to set up a Traditional IRA. I think it took me about 30 minutes.

No comments:

Post a Comment