An individual retirement account (IRA) is a savings account specifically designed to help individuals save for retirement. IRAs come in various types, but they all provide a tax-efficient way to accumulate funds for later use during retirement.
These accounts offer tax advantages by allowing you to reduce your taxable income and invest your money with a financial institution such as a bank or investment firm.
Each year, you can contribute up to the annual limit or your earned income, whichever is lower.
There are two primary types of IRAs: traditional and Roth IRAs.
A traditional IRA is the more commonly known type. It allows you to deduct your contributions from your taxable income in the year you make them. However, the growth and interest earned within the account will be subject to taxation when you withdraw funds during retirement.
On the other hand, a Roth IRA requires you to pay taxes on your contributions upfront. However, your funds can grow tax-free, and you won’t be taxed on qualified withdrawals made in retirement.
If you’re looking to open a brokerage account for your IRA, platforms like Webull offer convenient options. This stock trading app provides Traditional and Roth IRA brokerage services with commission-free trading, fractional shares investing, and helpful tools for stock research and analysis, enabling you to make informed investment decisions.
Investing Through Your Employer #
Many individuals choose to save for retirement through employer-sponsored retirement plans such as 401(k), 403(b), or 457 plans. These plans allow you to allocate a portion of your paycheck towards a retirement account that offers various investment options, including mutual funds or company stocks.
Employers often provide a matching contribution up to a certain percentage of your contributions. This matching contribution acts as an additional incentive to encourage employees to participate in the plan. It’s essentially free money that results in a 100% return, making it a wise decision to contribute to your employer’s retirement plan.
If possible, it’s advisable to gradually increase your contribution percentage over time. By learning to live within your current income and allocating a portion of each annual raise towards your retirement plan, you can make significant progress over the long term without negatively impacting your short-term financial situation.
