One of the great perks of having a “real” job is the retirement plan.
Being able to automatically send a portion of your paycheck into an investment account can help you shore up your future. It’s even better if your employer offers a match — that’s free money in your investment account.
But what if your job doesn’t come with a retirement plan at all?
The good news is that anyone can start investing for any reason. Even better, it’s possible for you to access tax advantages when investing for retirement by opening an IRA.
Here’s what you need to know about saving for retirement on your own.
Choose your Individual Retirement Account (IRA)
Anyone with earned income is eligible to open an IRA. There are two main types of IRA to consider if you have a job, but your employer doesn’t offer a retirement plan.
A traditional IRA allows you to contribute money before you pay taxes on the income. You get a tax deduction for your contribution, reducing your taxable income and what you owe. At tax time, you will receive a statement from the broker about how much you contributed and you can claim that on your Form 1040.
However, there is a phaseout associated with your deductions if you or your spouse has a retirement plan through work. While there are no income restrictions on who can contribute to a Traditional IRA, a higher income can mean that you can’t deduct those contributions on your taxes, depending on the employer-sponsored plan situation.
Later, you must pay taxes when you withdraw money from your retirement account. Your withdrawals are taxed at your marginal tax rate.
When opening a Roth IRA, you contribute after-tax money. You won’t be able to use your contributions to reduce your taxes today. However, the money grows tax-free, so you never pay taxes on your earnings.
If you think your taxes will be higher in the future, it might make sense to open a Roth IRA. You pay taxes now, and later you can save money.
There are income restrictions on contributing to a Roth IRA, though. As your income increases, you may be required to switch to Traditional IRA if you make too much.
If you own your own business, you have other options, including SEP IRA and SIMPLE IRA accounts.
If you have a side business you work on outside of your “real” job, you might be eligible for one of these accounts. They typically allow a higher yearly contribution.
How to open an IRA
Once you decide what type of IRA works best for your situation, it’s time to open your account.
There are many brokers and advisors that allow you to start investing by using an IRA. You can even open an account with many brokers with a $0 minimum balance. If you can commit at least $100 a month to investing in your future, it’s possible to get started fairly easily.
Find a broker or advisor that fits your needs. Opening an IRA account with a company like Betterment, Wealthfront, or FutureAdvisor can help you get started quickly and easily using index funds and ETFs.
Using funds is one of the best ways for beginners to start building a nest egg because it offers instant diversity and spreads out the risks involved.
Once you open your Traditional or Roth IRA, set up an automatic account transfer. This will allow you to automatically move money from your checking account to your investment account each month, without you thinking about it.
You can also ask your human resources department if it’s possible for them to contribute for you. In some cases, you can fill out a special direct deposit form that diverts a portion of your paycheck to your IRA. It’s not the same as having an employer contribution, but it can make your life easier.
Try the myRA to start
Another option you have is to open a myRA. This is a type of retirement account offered by the government. You can contribute as little as $2 per paycheck, and your money earns at the same rate as the Government Securities Fund.
You can set up your contributions from your own checking account or go through the process of having your human resources send a direct deposit from your paycheck.
With the myRA, you can only save up to $15,000 before you are required to roll the money into a private IRA account.
Your potential earnings are lower with a myRA than with a private sector IRA. When you open an IRA on your own, you can choose your investments and grow your wealth using stocks. With the myRA, your options are more limited. However, there is a low barrier to entry and it can be a good start before you move on to other accounts.
Health Savings Account (HSA)
Finally, if you want more tax-deductible savings and your employer doesn’t offer a retirement plan, you can use the Health Savings Account as part of your plan.
The HSA is a savings account that allows you to set aside money for healthcare costs. This includes copays, prescriptions, and other out-of-pocket expenses.
There are eligibility requirements that include the type of health insurance plan you have. However, if you qualify, you can contribute to your HSA for a tax deduction now and tax-free growth over time.
If you let the money sit, you can treat an HSA like a Traditional IRA when you reach age 59 ½. Otherwise, you need to make sure you use the money for qualified healthcare expenses.
Keep your retirement on track
Opening an IRA, myRA, or HSA can help you keep up with retirement, even if your employer isn’t helping.
You don’t want to fall behind on saving for your future. Don’t rely on your employer to provide for you. Take charge of your retirement with the help of your own tax-advantaged retirement account.
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