The yearly contribution deadline is normally the same as the tax deadline for the year in question. For example, the 2024 IRA contribution deadline is April 18th, 2024.
Contributions to conventional (non-Roth) IRAs are tax deductible and can help people reduce their taxable income while saving for retirement.
What Kinds of Investments Can You Make With an IRA?
Stocks, ETFs, mutual funds, and bonds are among the investment alternatives available in an IRA. Depending on your account type and your level of expertise, options and futures may also be permitted in IRAs, Rick Swope, senior director of investor education at E-Trade, explained. IRAs help consumers save for retirement in tax-advantaged investment accounts.
Another advantage of IRAs over employer-sponsored 401(k) plans is the variety of investment options accessible. Swope said that this is a significant advantage for investors seeking greater control, as opposed to a 401(k), where the universe of funds is restricted to those supplied by the plan.
In addition to having greater investing options, individuals frequently use IRAs when their 401(k) or 403(b) plan has been exhausted or if their company does not provide a retirement plan.
The contribution limit is a significant distinction between an IRA and a 401(k). The maximum contribution to an IRA is $6,000, or $7,000 if you are 50 or older. Contribution limitations for 401(k) and 403(b) plans usually are greater, although they vary greatly based on your age and tax situation. Visit the IRS Profit-Sharing Plan Contribution Limitations website for a complete 401(k) contribution restrictions breakdown. With today’s lifespans, an investor may need to rely on their retirement assets for a few decades, Swope added.
What Is the Different Between Traditional and Roth IRAs?
Roth and regular IRAs are also taxed differently. When people invest in a Roth IRA, they pay taxes on their contributions now, but their withdrawals are tax-free when they retire. Traditional IRAs, on the other hand, allow you to deduct contributions now while paying taxes on future withdrawals.
How to Make the Most of Your IRA Account
Because the funds in an IRA are intended for retirement, which might be decades away, investors may not need to be as cautious as they believe, according to Swope. If you have a little nest egg, he added that ETFs or mutual funds offer reduced entry hurdles owing to lower minimum quantities and expenses and enable you to diversify faster.
While retirement accounts are intended to be long-term savings vehicles, reviewing your account balance and allocations frequently is a good idea. But, the money invested in an IRA is purely for retirement, and the IRS applies certain penalties if you remove it from the account before reaching the age of 59.5 years.
Short-term trading tactics, such as buying and selling ETFs in an IRA, are also used by some investors to produce money. Swope said it could be a good option if you’re succeeding with those tactics, but remember that trading losses in an IRA are not tax deductible.
What You Should Know About IRAs and Taxes
According to Derek Horstmeyer, an associate finance professor at George Mason University in Fairfax, Virginia, IRAs are fantastic for shielding your assets from capital gains and other taxes.
Investors should put their most tax-inefficient vehicles in an IRA since they profit the most. He explained that any high turnover funds or other accounts that incur a lot of taxes must go into your IRA.
Investors who hold actively managed mutual funds because the portfolio manager makes strong stock decisions should put them in an IRA since the manager may often change the fund’s positions by buying and selling a variety of equities, according to Horstmeyer. This also applies to most small-cap mutual funds and high-coupon bond funds, which generate tax revenue. Because of their tax inefficiency, your IRA should also include REITs.
With the new tax law that allows annuities to be used in IRAs and other savings vehicles, if you are in a high tax bracket, your annuities should be allocated to an IRA to protect you from potential income taxes, he added.
Many baby boomer investors are working far into their retirement years. Swope believes that the recently approved SECURE Act 2.0 helps update the law in light of the patterns he sees among today’s elderly population. The provisions include extending the minimum distribution age to 72, eliminating the maximum contribution age, and enabling penalty-free withdrawals for childbirth or adoption-related expenditures. He said to make sure you are aware of this law and speak with your tax professional to learn more.