Don't sleep on IRAs. They are game-changers and you cannot afford to miss out on the benefits!
We've all heard the term before. It's usually thrown into conversations along with 401ks and the stock market. We've heard our grandparents talk about them, our parents, maybe even our co-workers. They seem like big scary things that only people on Wall St know what they are. So, what are they really? Why do they matter? And why does everyone else seem to understand them?
IRAs are one of those things we never learn about in school but is something that is super important to our financial success. Like most personal finance items, people tend to keep it on the down-low for a few different reasons like they were raised to not talk about money, they have an IRA but don't really understand it themselves, or they just don't even have one. IRAs tend to get thrown into the "this deals with my personal finances so I don't openly talk about it" category. Which is totally understandable, most of us are raised not to talk about our finances.
Sadly, few people truly understand that IRAs can be the unsung hero of your retirement dreams! So I am happy to take this opportunity to change your life. You think I'm crazy? I mean, I am but that's a different story. IRAs can be the difference between retiring comfortably or having to work until you literally cannot work anymore. Look, I know we're young and retiring is such a looooong ways away. We've got plenty of time to get our shit together, right? WRONG.
It's okay if you haven't started yet, don't feel guilty or beat yourself up. We're gonna learn you real good here because I know the biggest thing holding you back is that you just don't really, truly understand what an IRA is or what it could do for you. That's where this article is gonna come in handy. We'll start off with the basics and in the next article, we'll dive a little deeper.
So, let's start off easy. IRA stands for Individual Retirement Arrangement (most people think the A stands for "account" but don't be fooled. Although a cool fact, don't bring this up at parties unless you want to be the nerd and no one talks to you for the rest of the night...)
There are 2 main types: Roth and Traditional. The biggest difference is that Roth is post-tax money - meaning you contribute money that has already been taxed (so money that is sitting in your checking account that your employer withheld taxes from before giving you a check or directly depositing into your checking account). While the Traditional is pre-tax money - meaning the money contributed to that account has not been taxed. How does pre-tax money get into that account though? Either from rolling over an old 401k (also pre-tax money) or by contributing from your bank account but then taking a deduction on your taxes that year (kind of like a rebate, you pay in full but then get some money back once you send in/file the correct form).
Roths (post-tax) are common investment vehicles for those who don't have access to a 401k or want to have more control over their retirement account. For example, I have a Roth IRA instead of investing in my company's 401k, 1) because I'm not eligible (yet) for the match, 2) the investment company they use has higher fees, and 3) I have way more options/control of which funds/stocks and other investments I can put my money in.
I've created a super easy to understand chart to sum up basically everything you just read and to help identify the main differences between a Traditional and a Roth.
This next thing is super important and if you only take one thing from this whole article, please let it be this because so many people have left so much money on the table for not understanding this one simple point. The Roth and/or Traditional IRA is NOT THE INVESTMENT, it's just the account. Think of the IRA as a Halloween bucket that holds all your candy (investments). Once the bucket (account) is open, you can start picking Reeses (stocks), M&Ms (bonds), and Snickers (mutual funds) and placing them into the bucket. This is how you become an investor in the stock market. This is how you start earning average annual returns of 8%.
And that's it! Pretty easy right? Seems to me like you've got the basics down, but if not, that's okay too. Sleep on all this info, maybe come back tomorrow and re-read it. Stuff will start to click.
If you do have it all under your belt, then hop on over to the next article: Why IRAs Matter to You - Deep Dive. We'll take a more in-depth and technical look at Roths and Traditionals including who can invest in them, income limits, when and how you can withdraw your money, and so much more!
Returns are not guaranteed. Different investments result in different returns. Investing involves risk and possible loss of money. Speak to an investment/financial professional. Read my full disclaimer HERE.