December 14, 2022 · Budget, Investment, Retirement, Taxes

How to Start Saving for Retirement with an IRA

How to budget and start saving for retirement—it’s easier than you might think!

There is a lot to think about when you look at your personal financial journey, and it can be difficult to take the first step toward saving for retirement.

First, if you have a 401(k) retirement plan offered by your employer that offers matching contributions, take advantage of this as much as you can. Your company may be offering you a match of “free” money toward retirement, and you cannot get this kind of benefit anywhere else.

Next, keep in mind that saving for retirement takes time; it is a long-term commitment, and might be a significant lifestyle change for you. It takes time to build and grow retirement savings, but don’t be discouraged! It’s never too late (or early) to start saving.

An individual retirement account (IRA) is a great way to start saving for retirement and can provide you with flexibility and control over how your money is invested.

So what is an IRA?

It’s worth doing some research to understand if an IRA is a good tool for meeting your retirement goals. Below is some important information on IRAs including what they are, how they work, and the various benefits that they offer.

An IRA is a type of personal retirement plan offered by many different financial institutions (such as banks, credit unions, brokerage and investment firms) that provides preferential tax treatment on retirement savings, usually through tax-free growth or tax-deferred growth. Tax-deferred growth means you don’t pay taxes on the earnings until you withdraw the money. IRAs are directly managed by the accountholder, while other types of retirement accounts, such as 401(k) accounts or pensions, are usually administered by employers.

All you need to open and contribute to an IRA is earned income for the year. Earned income includes wages, salaries, commissions, self-employment income and other forms of income. It does not include Social Security, pension payments, deferred compensation or annuity income.

So…why should I want or need an IRA?

An IRA can replace or supplement an employer-sponsored retirement program, such as a 401(k) account or a pension. The employer-sponsored plan may not be generous in terms of matching funds or have the flexibility of investment options provided by an IRA. With an IRA you have more control over the account than with an employer’s plan and, often, a much wider range of investment choices.

As you consider an IRA, 401(k), or some other type of retirement account, take some time to think about how much you can reasonably put aside for retirement. If you’re concerned about being able to pay your current bills and have upcoming expenses that are a financial priority, then you may want to hold off on putting money into an IRA—or consider putting a smaller amount toward retirement and focus on more pressing financial needs, such as creating an emergency fund.

When is a good time to open an IRA?

The earlier you open an IRA, the greater your opportunity. Besides considering whether to invest your money in an IRA, you might also invest time to talk to an IRA Specialist. IRAs were created for retirement savings, and withdrawing money from an IRA before you reach age 59 1/2 may cause you to incur taxes and financial penalties. Be sure that you are comfortable putting money into an IRA and not touching it—potentially for many years—before opening an account.

How much money do I have to invest to open and start retirement savings in an IRA?

For some financial institutions, there is no minimum amount required to open an IRA; but check with your bank, credit union or other financial institution. The maximum amount that can be contributed to an IRA in a single tax year in 2022 is $6,000 ($7,000 if you are 50 or older). That’s an aggregate limit and is not increased by opening additional IRA account.

What are the basic types of IRAs?

Two of the most basic types of Individual Retirement Accounts (IRAs): the Traditional IRA and the Roth. Both of them can help save, invest and grow your money, but they work differently. Here’s how they differ:

  • With a Traditional IRA, the money you contribute reduces your current year’s income by the amount that you’ve contributed—potentially reducing your taxable income. While the money is in the IRA account, it isn’t taxed. However, when the money is taken out during retirement, you’ll pay ordinary income tax, since the withdrawal will count as part of your taxable income. Generally, people are in a lower tax bracket during retirement when the funds are withdrawn and therefore, less taxes are owed. Be careful though—if you take out the money before you reach retirement age (59 ½), you have to pay an early withdrawal penalty of 10%.
  • The Roth IRA has tax advantages too, but they are different than the Traditional IRA. With a Roth, you cannot take a deduction for your contributions during the year and you must pay taxes on the amount that’s invested. But, after you reach retirement age (59 ½), you can withdraw the money without paying taxes on it as long as you have held the account for five years.

The IRS has a document with extensive answers to frequently asked questions on contributions, distributions, loans, rollovers and other questions on its site. It’s important to invest time in learning more about IRAs, since different IRAs offer different benefits.

What about other savings advice besides retirement and IRAs?

The Credit Union’s blog has more information that could be educational and helpful:

More free advice is available at Delta Community…

There are also free Delta Community Financial Education Center public live, in-person workshops and on-demand webinars on many different money-related (and some cybersecurity) topics. You can visit the Financial Education Center's Events & Seminars page to register for its sessions.