The sooner you open one, the more you can benefit.
- Investing over many years can help you build up a lot of wealth.
- If you’re going to do that, you might as well score some tax breaks along the way.
- An IRA account can help you build wealth and save on taxes.
Any money you need for near-term goals or emergencies should be kept in a savings account. But money you’re earmarking for long-term goals should absolutely be invested.
When you invest your money, you give it a chance to grow into a larger sum. And your best bet when it comes to investing is to give yourself as long a window as possible to do it in.
Financial expert Suze Orman is a fan of long-term investments. She often talks about the importance of putting money into quality assets and holding them for many years on her “Women & Money” podcast.
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If you’re going to invest over the years, there are different places you can put your money. You could opt to invest in a regular brokerage account, and that way, your money will be unrestricted. You’ll be able to liquidate investments and cash out at any time without penalty (though you may end up paying capital gains taxes).
But if you’re going to be investing for decades, it pays to keep your money in an account that comes loaded with tax breaks. And that’s why an IRA account may be a better choice.
The upside of using an IRA
Your goal as an investor is to make money. And while that’s a good thing, when you have a regular brokerage account and make money in it year after year, you’re also taxed year after year. With an IRA, that won’t happen.
Rather, investment gains in an IRA are tax-deferred until the time comes to take withdrawals from your account. So if you make money on investments in an IRA in 2022 but don’t take withdrawals until 2042, you won’t have to deal with taxes on your gains until — you guessed it — 2042.
Plus, the money you put into an IRA goes in tax-free and helps exempt some of your income from taxes. You don’t get this perk with a regular brokerage account.
So, let’s say you decide to put $5,000 into your IRA one year. That’s $5,000 of earnings you won’t pay taxes on.
The downside of using an IRA
IRAs come with certain rules you have to follow in exchange for getting these tax breaks. For one thing, you can’t tap your IRA until age 59½. If you take a withdrawal earlier, you’ll face a 10% penalty on the sum you remove (though there are limited exceptions).
Also, IRAs limit you to a certain contribution amount each year. In 2022, for example, you can only put up to $6,000 into an IRA if you’re under age 50, or $7,000 if you’re 50 or older.
But still, if you’re going to be investing for many years — which is a good thing to do — then it pays to enjoy tax breaks in the process. And remember, if you want to invest more than what IRAs allow for, you can always max out your IRA and then put your remaining investment dollars into a taxable brokerage account.
Either way, your goal should really be to start investing from as young an age as possible. Suze Orman talks all the time about the power of compounding — the concept of earning returns not just on your initial investments year after year, but also reinvesting your gains and earning returns on that money. And even if you decide that you’d rather stick with a regular brokerage account, the key is still to give yourself as long a window as you can.
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