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I've got a new job and I wanted to know how to start saving for retirement?
I'm 22 and recently got a job and make about 30k a year. My whole life I've been investing money in the stock market but I heard that I could invest in these IRA things and they would be a tax write off for me? This is my first real job and the first time I will be filing my taxes as an independent so I need to reduced my taxed income as much as possible. First off, can someone explain to me the difference between and IRA and a Roth IRA? Which would you think would be best for me? I'm looking for a safe place to put my money so that I can have it for when I retire. Next, where do I acquire the type of IRA you suggest? Can I go to an Edward Jones or something and get one from them? If I am getting interest on this investment, where does that money come from? Let's say I get another job down the road that has a 401K or something, can I still keep my IRA? Finally, if I die before I turn 60 or whenever it is that I can take the money out, will my kids (if I have some) be able to get that money?
1 Answer
- Anonymous1 decade agoFavorite Answer
A traditional IRA gives you a tax deduction for the amount you contribute, which is up to $5,000 at your age. In the future, you may be able to make larger annual contributions. Your earnings will be tax-deferred. However, later when you withdraw the money in retirement, you have to pay regular income tax on the amount you withdraw.
A Roth IRA does not give you a tax deduction, and you can contribute $5,000 this year to a Roth IRA. However, your earnings will be tax free as long as you follow the rules for this type of retirement arrangement. By the time you retire, due to the effect of compounded interest, most of the money in your Roth IRA will be from earnings, and you will be able to withdraw all of the money tax free.
There are qualifications for the IRAs, but from the information you provide, you should be able to qualify for either a Roth or traditional IRA. At your age, I recommend you select the Roth IRA. It is also available to you in emergencies - you are allowed to withdraw your contributions (but not the earnings) at any time because you already paid taxes on your contributions to a Roth IRA.
You can fund both an IRA and a 401k; however, you may not be qualified to make tax-deductible contributions to a traditional IRA if you have a qualified retirement plan available to you at work and you earn a higher income. I think you're better off with a Roth IRA, anyway.
You can leave the proceeds of a Roth or traditional IRA to your heirs. However, you are required to take distributions from a traditional IRA beginning at age 70 1/2, so with the Roth you will be able to leave more of your IRA to your heirs if you so wish. There are no requirements to take distributions from your Roth IRA.
You can begin withdrawing from a traditional or Roth IRA at age 59 1/2 without tax penalties. If you die before then, the IRA will belong to your designated beneficiaries.
You can establish an IRA at any bank, credit union or brokerage, including Edward Jones.