Before I became a personal finance freek, I had no idea there are 3 types of IRA accounts. To be honest, I didn’t even have an IRA account until 2 years ago! I thought I was killing my savings/retirement game by maxing out my yearly contributions with my 401(k). But the 401(k)s $18,000 limit is restricting for a guy like me who is going pretty hard on saving and investing.
This is why I love the IRAs. It’s an additional account you can have to build your contributions for retirement! Even if you have a 401(k), the IRS allows you to have this additional retirement account. HOWEVER, be aware that you may not be able to deduct the contributions to your IRA depending on your income.
So, to make this blog post easier to digest, I spent an hour putting this infograph together to give you a snapshot of each type of account.
Now that you’ve got a good understanding of the differences between the 3, here is a strategy I used to maximize my retirement contributions…
Here are my personal tips and strategies:
Since graduating from college, our household income has changed year over year. We’ve taken advantage of our employer’s match with the 401(k), so we contributed just enough to get that full match. Then, we shifted our contributions to our IRAs to tax advantage of the tax free growth feature.
In the past 2 years our income has increased and our strategy now is to max out our 401(k) and make additional contributions to our IRA account.
Here are my general suggestions:
- What are your current employer’s retirement benefits? Is there a match? If so, contribute every dollar possible to get that match money.
- Are you maxing out your 401(k) contributions? Open an IRA account to make additional contributions. Check out the adjusted gross income limitations because that will mean the difference between a Traditional and ROTH IRA.
- Are you contributing to your 401(k) but not maxing out the contribution limits? Focus on achieving the employer match and then shift your contributions to an IRA for the tax free growth.
If your employer does not offer a 401(k) plan or any type of retirement benefit, the IRA account is a perfect account for you to get started with your contributions.
Bottom line is to create a game plan with your money! Tell it where to go and how it should work for you.
If you’re interested in more of the nitty grity details of each account, be my guest and check out the IRS regulations for each by clicking here.