A retirement road map should include an individual retirement account, or IRA, as an investment tool for saving and growing wealth during your golden days.
There may be situations where your employer does not offer a 401(k), or you have maxed out your 401(k) and are considering other options. IRA is a viable option with unique features that can enhance your overall investing strategy.
Different accounts serve different purposes. IRAs are generally designed to help you plan for retirement. For long-term investing in retirement, the following are the things you need to know about IRAs.
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What is an IRA?
To save and invest for the future, individuals can open an IRA with tax advantages.
The IRA is intended to encourage people to invest in retirement, just like 401(k) accounts that employees receive from their employers. Anyone with earned income can open an IRA, and these accounts offer tax benefits. An IRA, however, can be opened without an employer’s involvement, which is why it is called an “individual” retirement account.
There are multiple ways to open an IRA, including through a bank, an investment company, a personal broker, or an online brokerage. There are four main types of IRAs, each of which has different advantages:
The contributions you make can potentially be deducted from your taxes, and you can potentially withdraw earnings tax-deferred in retirement. In many cases, retirees find themselves in a lower tax bracket after retirement, so the tax-deferral can lower their tax bill.
To save for retirement and avoid taxes, you can focus on self-directed individual retirement account (IRA) real estate investing.
In contrast to traditional IRAs, Roth IRA contributions are not tax-deductible, but qualified distributions are tax-free. Roth IRA contributions are made with after-tax dollars, but investment gains are not taxed.
Withdrawals from the account can be made without triggering income taxes when you retire. Roth IRAs don’t require minimum distributions (RMDs). The money in your account doesn’t have to be taken out if you don’t need it. No matter how old you are, you can contribute to a Roth IRA if you have earned income.
You contribute to this traditional IRA by rolling over money from a qualified retirement plan. A rollover involves moving assets from an employer-sponsored plan into an IRA, such as a 401(k) or 403(b).
Businesses without other retirement savings plans are eligible for this type of IRA. Savings Incentive Match Plan for Employees (SIMPLE) IRAs are similar to 401(k) plans. However, they have simpler administration and lower contribution limits than 401(k) plans.
With either a traditional or Roth IRA, you make your savings grow more quickly or compound than they might in a taxable account because of the tax benefits.
Why Invest in an IRA?
Most financial experts estimate that you will need about 85% of your pre-retirement income in retirement. You may not be able to accumulate enough savings through an employer-sponsored savings plan like a 401(k). The good news is that you may contribute to both a 401(k) and an IRA.
Your employer-sponsored pension plan should be supplemented with additional savings. You may be able to select from a wider range of investment options than the options offered by your company’s plan. Make use of the potential tax-deferral or tax-free growth.
To maximize your savings, you should contribute as much as you can to your IRA every year. When retirement approaches and your goals change, keep track of your investments and adjust them as needed.
How to Invest Your IRA
In contrast to a workplace retirement plan like a 401(k), an IRA offers a much more comprehensive array of investment options.
Most IRA plans allow you to choose stocks from a long list of options, or you can also select from a wide range of mutual funds. You can also hire a low-cost Robo-advisor, a computer-based investment manager, to do the decision-making for you.
The following steps will guide you through the process of choosing investments for your IRA.
Learn About Assets Allocation
It seems complicated, but asset allocation simply refers to how your money is divided between different types of investments.
As a whole, stocks, bonds, and cash make up the big picture; as a small picture, it looks at specifics such as large-cap stocks versus small-cap stocks, municipal bonds versus corporate bonds, real estate investment for retirement, etc.
A 60/40 asset allocation means that of $10,000 invested in an IRA, $6,000 is in stock funds, and $4,000 is in bond funds. It’s essential to remember that stocks, also known as equities, will give the best returns over time but pose the most significant risk, whereas bonds and other fixed-income investments lower the risk.
Identify Your Risk Tolerance
To make this work, you need to consider your time horizon — the length of time you’ll invest your money — and your risk tolerance. Taking enough risk will make your money grow, yet not too much so that you bail out or lose everything you own.
The most notable rule of thumb is to subtract your age from 100 or 110 if you want to be riskier. According to this rule, if you’re 30, you should direct 70% to 80% of your portfolio toward stocks.
Using this rule as a starting point, you can edge the numbers around until they suit your needs if you find you want more or less equity exposure than it suggests.
Your age matters since, in general, you should take more risks when you’re young, then decrease them as you approach retirement. Even so, many people choose to trim down their stock investments in retirement so that they have more fixed-income allocations from which to take distributions.
Given today’s life expectancies, most people will still need to have money in retirement to last 30 or more years beyond age 67.
By doing so, you don’t have to sell when the market tumbles; instead, you can pull funds from your portfolio’s safer havens.
Saint Investment offers institutional-quality real estate investments with a consistent, diversified portfolio. Our team combines state-of-the-art technology with in-house expertise to make your investment as worthwhile as possible. Don’t hesitate to contact us today!
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.