Where Should an IRA Fit into Your Retirement Plan?

Your retirement plan is one of the most important parts of your overall financial health. An IRA is one of the possible tools you can include in your retirement plan. Here are a few things to consider about IRAs and how they should fit into your retirement plan as a whole.

IRA Basics

In order to decide how big of a part IRAs will play in your retirement plan, you need to make sure that you understand them. The term IRA stands for Individual Retirement Account. This is an account that you have a certain level of control over what you invest in. You can contribute money to the IRA on a pre-tax basis. Then the money is allowed to grow tax-free over the years that you have the account. Then, at age 59 1/2, you can start to withdraw money from the account. You will then have to pay taxes on the money that you withdraw. The IRA allows for a maximum of $5000 to be contributed every year, unless you are over the age of 50. Then you can contribute as much as $6000 per year to catch up. 

Fitting In

Ideally, your IRA will play a big role in your ultimate retirement. However, you may not want to use it exclusively as your retirement plan. There are other options that you should consider in conjunction with the IRA in order to ensure that you meet your retirement goals. Since you can only contribute a maximum of $5000 to the plan every year, eventually you may get to the point that you want to contribute more than that to your retirement. Having other retirement accounts gives you the ability to save money for retirement at a faster rate. Here are a few other types of accounts that you could consider combining with an IRA to maximize your benefits. 

401k

One of the best types of retirement accounts to combine with an IRA is the 401k. A standard 401k is only available through an employer. If you work for an employer that provides a 401k for their employees, you should most definitely take advantage of it. With a 401k, you can contribute up to $16,500 each year towards the account. In addition to that, your employer can make contributions to your account for you. Many employers have a contribution match feature. For example, if you put in 6% of your income, they might put in 3% for you. You just made a 50% return on your investment before you ever invest your money. If you do not take advantage of this, you are leaving money on the table.

Roth IRA

Another account that you might want to consider is the Roth IRA. This type of account allows you to contribute money after it has been taxed. Then it is allowed to grow tax-free and be withdrawn tax-free. This allows you to hedge your investment portfolio a bit and get some money tax-free upon retirement. 

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