When it comes to retirement accounts, there are a few options for what you can do outside of your work 401(k).
An Individual Retirement Account, also known as an IRA, and a Roth Individual Retirement Account, also known as a Roth IRA, are two options where you can invest money for your retirement.
Retirement planning is important and if you want to ensure you have enough for retirement, you may want to consider opening up an additional retirement account.
An Individual Retirement Account, also known as an IRA, is a type of retirement account that lets you contribute pre-tax income, and you can choose where your money is invested. In addition, the money in this account will grow tax deferred.
This means you will not pay any taxes on growth while still contributing to this account. However, once you begin to withdraw money from this account, you will have to pay taxes.
To be able to open and contribute to an IRA, you will need to have an earned income. You can contribute up to $6,000 of pre-taxed dollars each year per the 2022 limit. This limit changes every few years. If you are over 50 years old, you can contribute up to $7,000 of pre-taxed income.
There is no income limit for a traditional IRA. Therefore, you can contribute to this account regardless of your income. This is not true for all retirement accounts.
Since an IRA is a type of retirement account, you cannot withdraw any money until the age of 59 ½ or later. If you need to withdraw your money early, then there is a 10% fee on top of the taxes you’ll have to pay. You’ll be taxed at your standard income tax rate.
Roth Individual Retirement Account, also known as a Roth IRA, is similar to an IRA.
It is a retirement account where you can invest taxed income. The money you will put into this account will be taxed at your current tax rate. However, your account will grow tax-free, and you will not have to pay taxes on any growth or withdrawals on this account.
Like an IRA, a Roth IRA has a contribution limit of $6,000 of taxed income as of the 2022 limit. If you are 50 years or older, then you can contribute up to $7,000. These amounts can change every year, so make sure you know the contribution limit for each year.
A Roth IRA has an income limit. You cannot contribute to this account if you make over a certain amount.
For example, as of 2022, if you are single and make over $140,000 a year, then you cannot contribute to a Roth IRA. The limit is double a household income. These limits can change from year to year.
Withdrawing money from a Roth IRA is different than a traditional IRA.
Any money that you have put into your Roth IRA can be withdrawn at any time. However, you cannot withdraw on any gain. For example, if you’ve put in $6,000 and your account has grown to $7,000, then you can only take out $6,000. Once you’ve taken out this money, you cannot put it back into your account.
At the age of 59 ½, you can withdraw all of your money from your Roth IRA. You will not pay any taxes on your gains.
A 401(k) is a great place to start for your retirement savings, but if you want to have more money for your retirement, consider opening up either an IRA or Roth IRA. Both have different purposes, but they are a great place to save extra money for your retirement.
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