Investing in an IRA, or Individual Retirement Account, is one of the best ways that you can prepare for your future. Both traditional and Roth IRAs allow you to grow your investment with a substantially reduced tax burden, which may increase your final retirement account value by hundreds of thousands of dollars. The earlier in life you take the step to set up an IRA, the better. However, even if you have spent decades in the workforce without opening an IRA, establishing an account now can still have a dramatic effect on the amount of your post retirement income. Understanding and computing the exact amounts you may receive when you withdraw or how much you should be contributing can seem nearly impossible without an advanced accounting degree. However, using various online tools such as a Roth IRA calculator can help you simplify this process significantly.
Choosing an IRA Type
The majority of those investing into IRA accounts open either Roth or Traditional IRAs. Contributions made to Roth IRAs are taxed right away, but will remain safe from many additional taxes, and can then be withdrawn after retirement tax free. Contributions into traditional IRAs are not taxed until the time of withdrawal. Not only are traditional IRA inputs tax deductible, this will also allow for a larger pretax principal balance which can be reinvested for greater financial gain. Both Roth and traditional IRAs have a $5,500 yearly cap on contributions, which raises to $6,500 after the age of 50. For many, the ideal contribution falls under the maximum allowed. Using an IRA contribution calculator can help to determine the exact amount that you should be contributing each year.
While there are many other subtle differences between Roth and traditional IRAs, the most important distinction is the time of taxation. As a general rule, if you believe your current tax levels will be greater than your tax rates at the time of retirement, a traditional IRA might be the best choice for you. If your current tax rates are likely to be lower than your retirement tax rates, you might consider purchasing a Roth IRA instead. Using an IRA contribution calculator as well as other various IRA calculators will give you more specific information to assist you in making the best choice for your financial future.
Using Online Calculators
You can obtain specific figures with online traditional and Roth IRA calculators which can help you better compare each account type to your specific situation by allowing you to determine exactly how much you can expect to save with either a Roth or traditional account. You will need to provide your starting balance, your expected annual contributions, your current tax rate, your age and age you expect to retire, your expected rate of return, your adjusted gross income and your marginal tax rate.
For example, if at the age of 32 a well employed man or woman may decide to invest in an IRA with the goal of retiring at 65. If they have a starting balance and an annual contribution rate of $5,000, an expected rate of return of 7%, a marginal tax rate of 25%, and an adjusted gross income of $50,000, using a Roth IRA calculator, they can easily see that they can expect a balance of $682,921 at retirement, which is $213,648 greater than what they would have received if they kept their balance in a taxable savings account.
Withdrawing From Your IRA
If you wish to tap into your account before you reach retirement age, you will be hit with an additional 10 percent penalty on all funds as well as income tax, if applicable. While this may be necessary in times of emergency, early withdrawal of funds is heavily discouraged.
Once you turn 59 ½, you may begin withdrawing any amount from your IRA penalty free. With a Roth IRA, some choose to never withdraw at all and instead use their Roth IRA as an inheritance vehicle to pass on financial assets. With a traditional IRA, you are required to begin making withdrawals at the age of 70 ½. The minimum you are required to withdraw is called your Required Minimum Distribution, and can be found by using an IRA withdrawal calculator. You will need to provide your age at the end of this year and the balance of your traditional IRAs.
Diversifying Your IRA investment
Diversifying your accounts is an important and often neglected step in protecting your accounts from market fluctuations. Many choose to diversify their retirement savings by opening both traditional and Roth IRA accounts. Another increasingly common diversification strategy involves rolling over a portion of your IRA account to high quality gold and precious metals brokerages. While the value of gold has skyrocketed in the last few decades, precious metals have been one of the most recession proof investments on historical record. When cash based investments such as stocks and bonds lose value, gold tends to increase. Including precious metals into your investment strategy can protect you from market volatility help you avoid financial losses due to unexpected drops in the market.
Working with well established and highly rated gold brokerages such as Regal Assets who also focus specifically on gold IRAs can substantially increase the expected final value of your IRA, even beyond the totals predicted by
Traditional or Roth IRA calculators, whether you choose a traditional or a Roth format. For example, a $33,000 gold investment made in 2001 would now be worth nearly $130,000, which is an unheard of return on investment of over 300%. Expert representatives from highly ranked gold IRA companies will also often provide free phone consultations, and will be able to provide expert advice geared towards your particular situation to help you decide whether or not this is a suitable investment for you.
Use Your Resources
With the incredible plethora of IRA resources available online, there is no more reason to blindly walk into poor investment decisions. Utilize tools such as IRA contribution calculators as well as free access to expert opinions, to learn how you can maximize your retirement savings.