An IRA is an account that you're supposed to use for income when you're retired. Money in an IRA grows on a tax-deferred or tax-free growth basis; this means that you can either:
- Pay taxes when you withdraw from your IRA in retirement.
- Pay taxes now, so that you don't pay taxes on earnings or withdrawals from your IRA in retirement (fine print: there's a 5-year aging requirement and the withdrawal needs to be qualified).
The advantages of an IRA depend on it's type. The three common types of IRAs are Traditional, Roth, and Rollover (and all three can be set up at Kapitall!):
- In a Traditional IRA, you contribute (deposit) money you could be able to deduct on your tax return (consult your tax professional). Any earnings in a Traditional IRA can potentially grow tax-deferred until you withdraw from it in retirement, which starts at age 59 1/2. Many people in retirement find that they are in a lower tax bracket than when they were working, so the tax-deferred income could be taxed at a lower rate.
- Roth IRAs are funded with money on which you've already paid tax (aka after-tax income) which means your money can potentially grow tax-free, including tax-free withdrawals in retirement, so long as some conditions are met (see above).
- A Rollover IRA is a Traditional IRA, but instead of being funded by contributions, it's usually funded by money "rolled over" from a qualified plan (like a 401(k)). You can still contribute to a Rollover IRA like you would a Traditional IRA (the annual limits would apply).
So why set up an IRA?
Financial experts estimate that you'll need up to 85% of your pre-retirement income in retirement. Even if you have a 401(k), it might not be enough to sustain you in retirement. Luckily, you can contribute to both a 401(k) and an IRA.
- Supplement your savings by contributing to an IRA and your employer-sponsored retirement plan
- Take control in a potentially wider range of investment choices than your employer-sponsored retirement plan
- Take advantage of the potential tax-deferred or tax-free growth benefits that an IRA can offer
Make sure you check on your investments and make adjustments as needed, especially when your retirement in on the horizon!
How do I set up an IRA at Kapitall?
You can set up an IRA at Kapitall the same way you set up any live account.
First choose between a Self-Directed Pro Portfolio (where you'd be making all of the investment decisions) or a Robo Portfolio (in which your funds are automatically invested based on a target allocation). On the first page of the Brokerage Account Application, choose Individual (IRA stands for Individual Retirement Arrangement) and IRA Account. A dropdown will appear on the IRA button so you can choose what kind of IRA you want.