4 Little-Known Perks of IRAs

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Thinking of opening an IRA for retirement savings purposes? Read on to learn about some of the benefits you might reap. 

Many workers rely on their employers to provide them with a savings plan for retirement. But not every company sponsors a 401(k) plan. So if you don’t have access to one, you may be thinking of opening an individual retirement account (IRA) instead.

As of 2020, only about 18% of Americans had an IRA, reports the U.S. Census. But that’s surprising given the benefits these plans offer. Here are four perks of IRAs you should know about.

1. They’re open to anyone with earned income

To qualify to contribute to an IRA, all you need to do is earn money. It doesn’t matter if you’re 15, 35, or 75. There’s no age limit to worry about.

However, there is an annual contribution limit you’ll need to stick to. This year, it’s $6,500 for workers under age 50, and $7,500 for those 50 and over.

Some people opt to work during retirement to earn extra cash and occupy their time. If you contribute some of your earnings to an IRA, you can shield some income from taxes.

2. They give you a limited penalty-free withdrawal to buy a home

If you’re funding an IRA to have savings down the line in retirement, then it’s generally best to leave that money alone until retirement. However, one thing you should know is that IRAs do allow you to take a $10,000 withdrawal at any age without penalty to purchase your first home.

Taking that $10,000 withdrawal could make it possible for you to become a homeowner at a younger age and start building equity in a place of your own. But remember, funds removed from an IRA can’t enjoy investment gains.

So let’s say your IRA generally delivers a 10% average yearly return, which is consistent with the stock market’s return over the past 50 years. If you remove $10,000 at age 35 to buy a home, you might end up with about $175,000 less retirement income by age 65 when you account for lost gains.

3. They offer more investment choices than 401(k)s do

With a 401(k), you’re generally limited to a mix of different funds to invest in, from passively managed index funds to actively managed mutual funds. You might consider that a good thing if you’re more of a hands-off investor. But if you like having a say over your investments, then an IRA may be a better bet.

IRAs allow you to buy stocks individually. If you’re willing to do your research and keep tabs on your portfolio, you may find that an IRA is more conducive to meeting your savings goal, since you get more of a say over how your money is invested. With a 401(k), you can pick your own mutual funds — but you don’t get to dictate which investments go into those funds.

4. You get extra time to make contributions

Contributions to a 401(k) plan must be made during a given calendar year to count for that year. Not so with an IRA. Rather, you get until the following year’s tax-filing deadline to finish funding your account.

So as an example, if you want your 401(k) plan contributions to count for 2023, that money needs to hit your account by Dec. 31 of this year. For your 2023 IRA, you have until the April 2024 tax-filing deadline to make those contributions and have them count for 2023 purposes.

Clearly, there are lots of benefits to saving for retirement in an IRA. You may want to consider one of these accounts for your nest egg, even if you happen to have access to a 401(k) plan through your job.

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