The point of having a financial plan for your future is to make retirement more relaxing. But is figuring out how to make the most of an Individual Retirement Account (IRA) causing you consternation? Don’t worry. Here’s how to use IRAs to invest without the stress.
Choose the Right Assets
Traditional and Roth IRAs are similar, but since they are taxed differently, they come with different investment strategies.
Because you pay taxes on money withdrawn from a traditional IRA, picking what to put in this account type should be based on both how much the investments will grow your account and on tax considerations. While stocks enjoy one of the lowest taxable rates of any investment, when they are in a traditional IRA, they are taxed at your regular income tax rate, which is probably higher. Remember this when choosing whether or not to put a lot of stocks – and choosing which type (growth or dividend-paying) – in your traditional IRA.
In both traditional and Roth IRAs, it’s always a good idea to have a diversity of assets in your IRA, but exactly what percentage of what will depends a lot your specific situation. Consider these things:
- Your risk tolerance
- Your current age (so how long the assets will be in the IRA before you need them)
Both traditional and Roth IRAs charge penalties (in the form of taxes and fees) for funds taken out before a certain age (currently 59.5). But there are a few situations where the IRS allows you to withdraw money without facing a tax crunch.
For Higher Education
You can withdraw money from your IRA with no penalty as long as you use the funds to pay tuition and supply costs for a qualified college, university, vocational school or other post-secondary program for yourself, your spouse or your children. You can also escape penalties if you’re paying for your grandchildren’s school. If you’re withdrawing from a traditional IRA, you’ll still have to pay the taxes on the amount; if you’re taking from a Roth IRA, the money is tax free.
For Your First House
If you have a traditional IRA, you can pull $10,000 from your IRA to help pay for your first home purchase without being charged a penalty (but you will be taxed). If you’re married, and your spouse also has an IRA, they can withdraw the same amount. If you have a Roth IRA that you opened at least five years ago, you can do the same, plus you’ll owe no taxes. If you opened your Roth IRA less than five years ago, you could incur a penalty for withdrawing.
Accessing funds to pay for certain “hardship” situations is also penalty free. And there are some exemptions for members of our country’s military reserves too.
Remember to check all the fine print on any possible exemptions before you withdraw to ensure you meet the requirements. And you often have a limited amount of time to use the money you withdraw, so don’t take it out too early.
Find Your Minimum Distribution
If you have a traditional IRA, when you reach 70.5 years young, you are required to begin withdrawing money from the account. How much you have to take out – your mandatory minimum distribution -- is determined by your age and the balance of your IRA. Use MAX’s Minimum Distribution Calculator to find yours.