3 Little-Known Benefits of Investing in an IRA

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There are more reasons to use an IRA than you might think.

Key points

  • IRAs are well-known vehicles for saving and investing for retirement.
  • However, some of the most useful features of IRAs are not widely known.
  • You have a few options for using IRA funds early, and you may be eligible for other IRA tax relief in addition to those you may already be familiar with.

There are a few characteristics of Individual Retirement Accounts, or IRAs, that are common knowledge. Many people know that these are places where you can save money and invest it for retirement, and it’s also well known that some IRA contributions can be tax deductible.

However, there are some features and benefits of IRA investing that many people are unaware of. Here are three of the most exciting benefits of opening and investing in an IRA that you may not yet know about.

1. You can contribute to an IRA even after the end of the year

For 2022, you can contribute up to $6,000 to your IRA, or $7,000 if you’re 50 or older. Since it’s already October, if you’re just getting started, it can seem daunting trying to maximize your contribution (and potential tax breaks) in just a few months.

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However, it is important to note that you have until the tax deadline to pay your contributions. This means your 2022 contributions can be made anytime up until April 15, 2023. You can open an IRA now and have over six months to make your 2022 contributions to your account – a much more reasonable timeframe for many. people.

2. There are several ways to use your IRA funds early

You generally cannot withdraw money from your retirement plan without penalty until you reach the age of 59½. And that is certainly true when it comes to IRAs. But you might not know that IRAs have a few special rules that might allow you to use your money sooner.

To start, you are allowed to make a one-time withdrawal of $10,000 from your IRA to help pay for the purchase of a first home. It doesn’t even have to be your home — if you want to help your child buy their first home, for example, you can use money from your IRA to do so.

You are also authorized to withdraw any amount from your penalty-free IRA to help pay for college expenses. In fact, many people who already have retirement plans at work open IRAs specifically for this purpose. The tax benefits are similar to 529 savings plans (especially if you use a Roth IRA), but there’s the added option of just using the money for your own retirement if your child doesn’t need it. of all.

It should also be noted that these early withdrawal exemptions are exclusive to IRAs. Qualified retirement plans like 401(k), 403(b), and 457 accounts do not. And while these withdrawals are penalty-free, withdrawals for first-time home purchases and college expenses from traditional IRAs are considered taxable income.

Roth accounts also enjoy a special early withdrawal privilege. Account holders are permitted to withdraw their Roth contributions, but not investment profits, at any time and for any reason.

3. You may be able to get another one tax relief

Technically speaking, this applies to any type of retirement account, but if you don’t have a retirement plan as part of your job, you might not be aware of it.

It is well known that contributions to a traditional IRA can be tax deductible and withdrawals from the Roth IRA can be tax exempt. But there’s another tax benefit called a retirement savings contribution credit (informally known as a savings credit) that many people don’t know about.

You can read an in-depth discussion of credit if you’re interested, but the short version is that savings credit is an income-based tax benefit that can essentially give you up to $2,000 in free money to reward you with. have invested for retirement. For 2022, married couples with adjusted gross income (AGI) up to $68,000 may qualify, and for single filers, the maximum is $34,000.

The bottom line is that IRAs aren’t just great ways to save money and build wealth over time. They can offer great tax advantages (especially if you have a low to middle income), they have flexible contribution deadlines that allow you to maximize your savings, and the money in your account can be more flexible than you expect. thought.

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