Individual Retirement Accounts (IRAs)

Oct 11, 2023 By Susan Kelly

IRA is a tax-deferred account that can hold investments you decide to invest in. There are two primary kinds of IRAs, Roth and traditional. The main difference between them is the way you pay taxes.

Traditional IRAs

You get an early tax break. Contributions can be deducted from your tax return. The account is tax-free. However, if you withdraw money from retirement, the tax is taxable as regular income.

Roth IRAs

It doesn't provide an upfront tax deduction. However, qualified withdrawals made after the age of 59 1/2 in accounts set up with a maximum of 5 consecutive years are tax-free. This is a major benefit, particularly if you anticipate being in the tax bracket that is higher during retirement.

IRA Contribution Limits

The most significant drawback to the savings you can make in the classic (or Roth IRA is the lower contribution limit if you earn more than you can afford and don't have the funds to contribute anything to a Roth. No matter if you're an IRA that is traditional or a Roth IRA, the annual contribution limitations are identical. For 2022, you can put aside up to $6,000 or $7,000 if you are 50 or over. This is a "catch-up" contribution for employees nearing retirement age.

Health Savings Accounts

If you're not certain that you'll be able to save $1 million from an IRA by itself, or even a Health Savings Account (HSA) could be an option to increase your savings in retirement. While HSAs are meant to cover healthcare costs, they could be a great source of income after you retire. The HSA contributions can be tax-deductible and reduce your tax burden when you use the contributions. The withdrawals are tax-free when you use the funds to pay for healthcare costs, including dental and vision services.

HSA Withdrawals in Retirement

You can withdraw funds in the HSA tax-free and without penalty for qualified medical expenses. After retirement, you may take out HSA money for any purpose other than healthcare without incurring taxes. After you reach age 65, you may utilize HSA funds to fund any purpose. You will pay normal income tax on distributions.

Taxable Investment Accounts

Suppose you've exhausted your IRA or an HSA. In that case, an investment that is a taxable account (aka an account that is not a retirement or brokerage account) is a different alternative to think about. They don't provide tax benefits, such as deducting contributions or growth that is tax-free. However, you stand a chance of making better yields than holding additional cash in a regular savings account. However, investment options that offer greater potential for returns also carry higher risk, so you must consider risks and time horizons in determining how much risk to accept.

You can put as small or as much as you want in a tax-deductible account. You can put the funds into bonds, stocks, mutual funds ETFs, exchange-traded funds (ETFs), REITs, and other possibilities. Be aware that the earnings earned from this investment are subject to capital gain tax. You should be prepared to determine how that will affect your ability to spend money in retirement.

Real Estate Investments

Another option to save for retirement is investing in real estate. If you own an IRA or brokerage account, you might already be able to access the real estate market through a mutual fund ETF or REIT. In addition to REITs, you can buy real estate for yourself to earn an income in retirement. If you decide to invest in a multi-family apartment such as a multi-family home, you can reside in one part and lease out the remaining. This can reduce your overall cost of living while also paying off the mortgage. Then, you could choose to continue renting out the house and earn a steady income from the rent. You can also decide to sell your (ideally appreciated) property and use the proceeds to pay for expenditures for living or investment options.

Invest in a Small Business

Another way to help you achieve those retirement objectives is by investing in a small-scale business. Small business investments don't necessarily mean you'll be a business owner. If you're not interested in taking the wheel and investing in a reputable firm as a silent shareholder. Suppose you decide to go into either investing or entrepreneurship in small-scale businesses. In that case, the profits of these companies aren't restricted, which means that the return on investment (ROI) is greater than other options. Of course, investments in small businesses come with a degree of risk. There is no guarantee that the amount of time or money you invest in a small company will result in a large yield over time.

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