Many workers save for retirement with employer-sponsored 401(k) plans. But if you don’t have access to a 401(k), you can still save for retirement in an IRA, and there are plenty of advantages to doing so. IRAs typically offer a wider range of investment choices than 401(k)s, making it easier for you to grow your money without losing a fortune to fees.
That said, the more vigilant you are about managing your IRA, the better that account will serve you. Here are three smart moves you can make with your IRA — both today and in the future.
1. Max out every year
Because IRAs have much lower annual contribution limits than 401(k)s, maxing them out is a lot more doable. Currently, workers under 50 can sock away up to $6,000 in an IRA each year, while those 50 and older get a $1,000 catch-up that brings their annual limit up to $7,000. Meanwhile, the annual limits for 401(k)s are $19,000 for younger workers, and $25,000 for those 50 and over.
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Of course, any contributions you make to your IRA will come in handy during retirement. But if you push yourself to max out on a yearly basis, you’ll have a very comfortable existence to look forward to.
Let’s assume you’re 25 years old with a goal of retiring at 65. If you max out your IRA over the next 40 years at today’s limits, keeping in mind that they can rise over time, and if your investments generate an average annual 7% return during that time, then you’ll be sitting on over $1.2 million in time for retirement.
2. Diversify your investments
The more wisely you invest your IRA, the more you stand to grow your wealth. As mentioned earlier, the good thing about IRAs is that they offer an array of investment choices, from individual stocks to mutual funds and index funds. But you’ll want to diversify your investments to avoid taking on unnecessary risk.
The great thing about both mutual and index funds is that they offer instant diversification, since you’re not buying individual stocks but rather are buying a bucket of stocks (or bonds). And since index funds are considerably cheaper than mutual funds — because when you buy them, you’re not paying for the input of an active fund manager — they’re a good choice if you’re looking to keep your fees low. It also pays to load up on individual stocks as well, but be sure to spread those investments out over different segments of the market so that if one sector takes a hit, others might compensate. Finally, remember that while it’s smart to go heavy on stocks when you’re younger, there’s a place for bonds in your portfolio, too.
3. Watch out for RMDs
Unless you have a Roth IRA, you can’t leave your retirement savings to sit and grow forever. Once you turn 70 1/2, you’ll need to start worrying about required minimum distributions, or RMDs. Your RMDs will be based on your account balance coupled with your life expectancy, and if you fail to take yours, you’ll face a 50% penalty on whatever amount you neglect to remove from your account.
If you’re turning 70 1/2 at any point this year, your first RMD will be due by April 1, 2020. All subsequent RMDs will then be due by the end of each calendar year. Keep in mind that RMDs trigger taxes, as do all withdrawals taken from a traditional IRA, so plan for those accordingly.
Your IRA will serve you well in retirement if you’re smart about how you fund, invest, and manage it. Make these key moves, and you’ll be thankful for it when you’re in a better place financially.
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