7 Reasons IRAs Are the Best Thing Since Sliced Bread | Personal-finance

According to the folks at Gold Medal Bakery, sliced bread was invented on July 7, 1928, when Otto Frederick Rodwedder developed a bread-slicing machine. IRAs, on the other hand, came into being much later, in 1974, via the Employee Retirement Income Security Act (ERISA).

Often underappreciated, IRAs can be surprisingly powerful wealth builders — and given that they can save us from financially precarious futures, they’re pretty great indeed — arguably even better than sliced bread.

Image source: Getty Images.

Here’s a look at IRAs, featuring seven reasons you should consider setting one up — or contributing more to and/or investing more effectively in one you already have.

1. They can make you rich

Let’s start with the most exciting thing about IRAs: They can help you amass a lot of money. There’s a limit to how much you can contribute to an IRA (or several, with the limit applying to the total contributed to all), and it changes every year or few years.

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It’s worth noting that IRA limits are far lower than 401(k) ones, but that doesn’t take away from the potential growth of an IRA. Here are the latest limits:

For 2022

401(k)s

IRAs

Contribution limit for all

$20,500

$6,000

Additional “catch-up” limit for those 50 and older

$6,500

$1,000

Total possible contribution

$27,000

$7,000

The table below shows how much you might amass just investing $6,000 each year — or $12,000, if you’re married:

Growing at 8% for

$6,000 invested annually

$12,000 invested annually

5 years

$38,016

$76,032

10 years

$93,873

$187,746

15 years

$175,946

$351,892

20 years

$296,538

$593,076

25 years

$473,726

$947,452

30 years

$734,075

$1.5 million

Data source: Calculations by author.

Ideally, an IRA will be just part of your overall retirement plan, so while you might be regularly socking $6,000 away in your IRA (or more, especially when contribution limits are raised), you could also be adding thousands of dollars per year to a regular, taxable brokerage account.

2. They can help secure a comfortable retirement

Making good use of your IRA(s) can help you retire with more peace of mind, assured of a nest egg you can draw on to help support yourself.

You’ll likely have Social Security income, of course, but know that the average monthly retirement benefit was recently just $1,665, or about $20,000 annually. You’ll probably want a lot more than that.

3. They can help you avoid taxes now — or later

Another great thing about IRAs is that they’re designed to help you save for retirement in a tax-advantaged way. There are actually two main kinds of IRAs — the traditional IRA and the Roth IRA — and they differ chiefly in the tax breaks they offer.

With a traditional IRA, your contributions are tax-deductible, so they shrink your taxable income for the year of your contribution and, thereby, your tax bill. Roth IRAs, on the other hand, offer no upfront deduction, but if you follow the rules, you can eventually withdraw money from your account tax-free.

4. They offer a wide range of investments

Remember how 401(k)s have much bigger contribution limits, making them seem better than IRAs? Well, here’s a significant upside for IRAs: You can invest in a far broader range of stocks, funds, and other securities in your IRA account than you can in a typical 401(k), which offers only a very limited menu of funds.

So if you want to invest in a bunch of individual stocks — such as growth stocks and/or dividend-paying stocks — you’ll be out of luck with your 401(k), but you can do so in your IRA. (Note: If you invest in stocks that end up soaring and they’re in your Roth IRA, you will likely have a hefty account come retirement that you can tap tax-free.)

5. They’re available to just about everyone

Next, IRAs can be used by most people, with a few income limit restrictions. Anyone can contribute to a traditional IRA, but for the contribution to be deductible, your income will need to be below a certain level. Roth IRAs have income restrictions, too, keeping high earners from contributing fully or at all. Note that Roth IRAs also have to be funded with earned income — so you can’t fund one with lottery winnings, and your kid can’t fund one with allowance money.

Those limits will affect only high earners, not those bringing in typical or even somewhat-above-average wages.

Here’s another IRA distinction: 401(k) accounts are available from many employers, but not all, and self-employed people are out of luck. But self-employed people can contribute to traditional or Roth IRAs — and there are several other special IRAs they might use as well, such as the SIMPLE IRA and the SEP IRA.

6. They’re easy to set up

IRAs are also easy to set up. You can establish an IRA with any good brokerage — and possibly even at your bank. Do a little comparison shopping first, and be sure the IRA you set up will let you invest in the kinds of things you want, such as individual stocks or certain mutual funds — and check out fee schedules, too.

These days, some brokerages are offering no-fee IRAs, while others do charge fees. Always opt for no fees — otherwise, you’ll needlessly be handing over a portion of your earnings regularly.

7. They’re flexible

Finally, IRAs are flexible in some ways. For example, when you leave a job where you have a 401(k) account, you can roll over your 401(k) into an IRA account. You may also be able to turn that account into a 401(k) with your new employer. Try not to just cash it out, as that can shortchange your retirement.

Meanwhile, if you earn too much to contribute fully to a Roth IRA, you may be able to invest in one via a “backdoor Roth.” You would contribute to a traditional IRA and then convert it to a Roth. You can convert a 401(k) account to a Roth IRA, too. Just know that any funds you convert that had originally bypassed taxes will count as taxable income.

Don’t underestimate the wonderfulness of IRAs. Read up on them and their rules and see which kind(s) will serve you best.

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The Motley Fool has a disclosure policy.

Christopher Lewis

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