DIY retirement: Starting your own IRA

Whether or not your employer offers a retirement plan, you can start saving on your own with an Individual Retirement Account, or IRA, and get many of the same advantages as an employer-sponsored plan.

IRAs provide tax advantages for retirement savings, and you can contribute each year up to the maximum amount allowed by the Internal Revenue Service; for 2017 and 2018, that limit is $5,500 for those under 50 years old, and $6,500 for those 50 and older. There are other limitations attached to these accounts, including annual caps on how much of your contributions can be deducted from income tax.

Contributions are typically tax-deductible – meaning your investment is effectively made with pre-tax dollars, just like a traditional 401(k).

It’s worth noting that you can start an IRA with a relatively small amount, and increase contributions as your earnings increase. In any case, starting early is key to saving enough for retirement: The younger you are when you begin saving, the more time your investments have to grow.

There are several types of IRAs available, each offering different tax advantages:

• Traditional IRA: Contributions are typically tax-deductible – meaning your investment is effectively made with pre-tax dollars, just like a traditional 401(k). You pay no taxes on IRA earnings until retirement, when withdrawals are taxed as income.
• Roth IRA: Contributions are made with after-tax funds and are not tax-deductible, but earnings and withdrawals are tax-free. For college graduates or younger professionals, a Roth IRA may be a better option because they are probably in the lowest tax bracket and would likely pay a higher tax rate later in life, meaning the taxes they would pay on their earnings after 40 or 50 years of growth would be more significant than any tax break they’d get today.
• SEP IRA: This allows an employer, typically a small business or self-employed individual, to make retirement plan contributions into a traditional IRA established in the employee’s name.
• SIMPLE IRA: This is available to small businesses that do not have any other retirement savings plan. SIMPLE – which stands for Savings Incentive Match Plan for Employees – IRAs allow employer and employee contributions, similar to a 401(k) or 403(b). Though it uses simpler, and therefore less costly, administration, it also has lower contribution limits.

Avoid the temptation to cash out these accounts (or any other retirement investments) when you change jobs; instead, consult with a tax advisor to see if transferring plans makes sense, and whether it’s possible to do so using a procedure called a “rollover contribution.” Transfering funds makes sense if your new plan has lower fees, which could increase your investment return. Rollovers are the tax-free distribution of cash or other assets from one retirement plan to another; the IRS website has information on the benefits of rollovers, as well as when and how to use them.

Adapted from this piece by the U.S. Securities and Exchange Commission

FOR MORE INSIGHT

On IRAs
IRAs: Advantages, disadvantages, and which one is right for you (Investopedia)
Rollovers of retirement and plan and IRA distributions (Internal Revenue Service)
IRA contribution limits (Internal Revenue Service)

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