Craig Thornburrow

Basics of IRA Investment For The Uninitiated

An IRA is designed to help you save for retirement, and with two different types of IRA investment, you have a choice for which one suits you best.

An Individual Retirement Account (IRA) is a tax-advantaged account designed to help you save for retirement. There are two main types of IRA investment, Roth and Traditional, each with different advantages.

With a Roth IRA, you make contributions with money you’ve already paid taxes on (after-tax) and your money may grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.

In a Traditional IRA investment, you make contributions with money you may be able to deduct on your tax return and any earnings potentially grow tax-deferred until you withdraw them in retirement. In either case, the tax benefits allow your savings to grow, or compound, more quickly than in a taxable brokerage account.

If you aren’t sure which one is right for you, it may help to ask yourself: Would you rather your money be taxed now, in your current tax bracket (Roth IRA)? Or would you rather your IRA contributions be taxed later, when you reach your golden years (Traditional IRA)? Your tax advisor may be able to help decide which is best for you.

IRA investment is important because financial experts estimate that you may need up to 85% of your pre-retirement income in retirement. An employer-sponsored plan might not be enough to accumulate the savings you need. Fortunately, you can contribute to both a 401(k) and an IRA. A Fidelity No-Fee IRA can help you supplement your current savings in your employer-sponsored retirement plan as well as help you take advantage of the power of compounding.

For Roth IRA, your earnings can accumulate in the account until you are 59½ at which time you can withdraw the money (both your contributions and the earnings in the portfolio) without paying any taxes on it if the account has been open for 5 years.

You don’t have to withdraw your money at age 59 ½ — in fact, you can keep contributing to the account until age 70 ½, and you can keep the money in the account after that age in order to earn more on your investments if you’d like.

Every investment has the potential to lose or make money. These two factors are called risk and reward. Generally speaking, risk vs. reward is a trade-off; the more risky the investment, the greater the potential to earn (or lose) money. Cash is the least risky investment, because the dollar has historically risen in value slowly and steadily over the years.

Putting all of your money into a single stock, on the other hand, is the most risky investment, since stocks can rise and fall in value quickly and dramatically. It all really depends on the type of person you are, which is the beautiful thing about IRA investment!

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