It’s called an “individual” retirement account (IRA) because you, as an individual, set up and manage it on your own. It’s not something your employer handles for you, like a work-related retirement plan. 

But what exactly is a traditional IRA, and how does it work? Let’s find out.

In this article, we’ll cover:

• What a traditional IRA is
• How traditional IRAs work
• Traditional IRAs vs other IRAs
• Pros and cons of traditional IRAs
• How to open a traditional IRA account

What is a traditional IRA?

A traditional IRA is a type of retirement account that offers tax advantages. When you contribute money, you’re often able to deduct that amount from your income taxes. This helps to lower your taxable income for the year.

For example, if you earn $50,000 a year and contribute $7,000 to a traditional IRA, your taxable income would be $43,000. This can potentially save you money on your tax bill.

A traditional IRA is best if:

• You want to lower your taxable income now
• You expect to be in a lower tax bracket in retirement

How traditional IRAs work

Anyone with earned income can contribute to a traditional IRA—there are no income restrictions. You can open a traditional IRA with Stash, your bank, or any other brokerage firm. 

When you put money into a traditional IRA, it’s not just sitting there idly. You get to decide how to invest it. You can invest IRA funds in various ways, like stocks, bonds, exchange-traded funds (ETFs), and other securities. 

The money inside a traditional IRA grows tax-deferred. This means you won’t pay taxes on it until you withdraw the money in retirement. Over the long term, this tax-deferred growth can help you build wealth.

Contribution limits

The annual contribution limit to a traditional IRA is $7,000 as of 2024. If you’re 50 or older, you may make an additional $1,000 catch-up contribution, for a total of $8,000 annually.

There are two caveats, though:

1. If you earn less than the current year contribution limit, you can only contribute up to the total of your earned income for the year. So if your earned income is $3,000, your cap is $3,000.
2. This limit applies to traditional and Roth IRAs combined. So if you have both accounts, your total contribution cannot go over this limit.

Tax deduction

Traditional IRA contributions are typically made with pre-tax dollars, so you can get an immediate tax benefit by deducting them from your taxable income for the year. Doing so might put you in a lower tax bracket or make you eligible for certain tax incentives.

If you don’t have an employer-sponsored retirement plan, like a 401(k) or 403(b), you can deduct the entire amount you’ve contributed for the year. However, if you or your spouse participate in an employer plan, you might not be able to deduct the full amount. 

The IRS sets deduction limits based on your filing status and modified adjusted gross income (MAGI). If you’re single and have a workplace plan, your MAGI must be below $87,000 to receive at least a partial deduction. If you’re married and filing jointly, you must earn less than $143,000. This income limit applies even if your spouse has a workplace plan, but you don’t.

Age limits

Before 2020, you couldn’t contribute to a traditional IRA past age 70½. But now, there is no age limit. Anyone with earned income can contribute to a traditional IRA. This change was due to the SECURE Act, which went into effect on January 1, 2020. 

Early withdrawal rules

Generally, you can start taking funds out of your traditional IRA when you turn 59½, and you’ll pay regular income tax when you make withdrawals. 

If you take out money early, however, you’ll usually have to pay a 10% penalty on top of income tax. There are a few exceptions to the IRA early withdrawal rule, including:

• Becoming totally and permanently disabled
• Paying for certain higher education expenses
• Buying your first home, up to $10,000
• Paying health insurance premiums while unemployed
• Taking substantially equal periodic payments (SEPPs) for at least five years or until you turn 59½, whichever comes later

Check out IRS Publication 590-B for important information on these and other exceptions.

Required minimum distributions (RMDs)

Once you reach a certain age, you’re required to start taking withdrawals from your traditional IRA each year. This age has gradually increased through various legislation over the past four years. Currently, if you reach age 72 after Dec. 31, 2022, then you must start making withdrawals at age 73.  These withdrawals are called required minimum distributions (RMDs), and they’re based on your life expectancy and IRA account balance.

If you don’t take RMDs, you could pay a hefty excise tax of up to 50% of the amount you were supposed to withdraw. So make sure you plan ahead and take your RMDs on time.

Pros and cons of contributing to a traditional IRA

Traditional IRA benefits

An IRA of any kind can help you put away money for retirement and possibly enjoy tax advantages. The particular benefits of the traditional IRA include:

• Your tax-deductible contributions can lower your taxable income for the year, and may even drop you into a lower tax bracket. 
• You pay no taxes on funds while they’re invested, meaning there’s more money in the account to compound over time.
• If you’re in a lower tax bracket when you make withdrawals than when you made contributions, you may pay less tax on your money overall.  
• You can invest in the stock market through a wide variety of securities, including stocks, mutual funds, and ETFs.
• There’s no income limit; you can put money into a traditional IRA no matter how much you make. 
• Some exceptions allow you to avoid the early distribution penalty. 

Disadvantages of traditional IRAs

Depending on your circumstances, there may be some downsides to a traditional IRA compared to other types of IRAs, including:

• Withdrawing before you reach 59½ years of age may result in a 10% penalty
• There are yearly limits on how much you can contribute
• You must take required minimum distributions after age 73
• Possible limits on tax deductions if you or your spouse have an employer-sponsored retirement plan

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How traditional IRAs differ from other IRAs

There are several different types of IRAs, both for individuals and employees. The terms of each differ based on eligibility, contribution limit, income limit, tax treatment, and a few other factors. The comparison chart below reflects information as of 2024 for four common types of IRAs.

Roth IRA

A Roth IRA is similar to a traditional IRA in many ways: it’s an individual retirement account that offers tax advantages as long as you leave your money in it until you turn 59½. The main difference between a traditional and a Roth IRA is when the money is taxed. When you start a Roth IRA, you pay income tax on money before you invest it. Then, when you make qualified withdrawals, you don’t pay any income tax at all, including on the money your account has earned. You’re also allowed to withdraw funds you’ve contributed at any time without penalty, though you’ll be subject to a 10% penalty if you withdraw earnings early.

A Roth IRA is best if:

• You want tax-free income in retirement
• You believe your tax rate will be higher in the future

SIMPLE IRA

The Savings Incentive Match Plan for Employees, or SIMPLE IRA, allows an employer to set up traditional IRAs for their employees; both the employer and employee can make contributions. It’s generally available for small businesses with fewer than 100 employees that don’t have another retirement savings plan, like a 401(k). If your employer offers a SIMPLE IRA, they’re required to contribute a certain amount each year, but you don’t have to put in any money. 

A SIMPLE IRA is best if:

• You’re a small business owner or work for a small business and want an uncomplicated way to save for retirement.

SEP IRA

The Simplified Employee Pension Plan, or SEP IRA, is a retirement account that can be established by either an employer or a self-employed person. Unlike the SIMPLE IRA, only an employer can contribute to a SEP IRA. The employer is allowed to take a tax deduction for contributions made, and they must contribute equally to all eligible employees. Note: if you’re self-employed, you are considered the employer, so you can make contributions and take tax deductions.  

A SEP IRA is best if:

• You’re self-employed or own a small business and want a simplified way to save for retirement while potentially contributing more than traditional IRA limits.

Rollover IRAs

If you have an employer-sponsored retirement plan and leave your job, you can usually do what’s called a rollover, in which you transfer the funds from your retirement plan into an IRA. Most people are eligible to roll over funds into either a traditional or Roth IRA, but there can be tax implications if you’re rolling over pre-tax (traditional) money into a Roth IRA. If you’re trying to decide what to do with your 401(k) or 403(b), you may want to brush up on the IRS rules for rollovers. 

A rollover IRA is best if:

• You’re leaving a job and want to consolidate your retirement savings from an employer-sponsored plan.

How to open a traditional IRA account

To get started with your very own IRA, follow these key steps:

Pick the right IRA provider

The first step to opening a traditional IRA is to pick a reliable provider. Research different options, like banks, online brokers, or Stash IRAs. Choose a provider that suits your investment needs and preferences.

Open your account

Once you’ve chosen a provider, complete the online application process to open the account. This usually takes 15 to 20 minutes, during which, you’ll be asked to give your name, address, and Social Security number to verify your identity.

Choose your contribution amount

Decide how much money you want to put into your IRA each year. The maximum contribution limit for 2024 is $7,000 or $8,000 if you’re at least 50. Remember, you’ll also be limited by your amount of earned income.

Select your investments

In a traditional IRA, you can invest in a variety of assets like stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Research and choose investments that suit your risk tolerance and financial goals. Stash has automatic investing tools to help you build wealth regularly. 

Monitor and adjust

Review your account’s performance and make adjustments as needed. This might mean rebalancing your investments or changing your contribution amounts. 

Use a retirement calculator to determine how much you’ll need to save for retirement based on your age and desired retirement income. This will help you set a realistic savings goal and plan for a comfortable retirement.

Is a traditional IRA right for you? 

The sooner you start investing for the future, the more time your money has to grow. When you’re deciding whether a traditional IRA is the right choice for you, you might consider things like:

• Flexibility: Are you able to leave your funds in your account until retirement age to avoid incurring penalties? 
• Tax deductions: Do you want to lower your tax bill now or pay less tax in the future?
• Income limits: Do you have a higher income level that might disqualify you from opening a Roth IRA?

When it comes to tax-advantaged individual retirement accounts, people are often weighing the pros and cons of a traditional IRA vs. a Roth IRA. Good news: you can have both.

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Frequently asked questions

1. What are the annual contribution limits for a traditional IRA?

In 2024, the maximum you can contribute is $7,000 or $8,000 if you’re 50 years or older. It’s essential to stick to these limits; there may be penalties if you go over them.

2. What happens if I contribute more than the annual limit to a traditional IRA?

If you contribute more than the annual limit to a traditional IRA, you might face a penalty of 6% on the excess amount every year until it’s corrected. This penalty can add up quickly, so if you accidentally over-contribute, correct it as soon as possible.

3. Can I have both a traditional IRA and a 401(k) plan?

Yes, you can contribute to both a traditional IRA and a 401(k) in the same year. However, your ability to deduct your traditional IRA contributions from your taxable income may be limited if you or your spouse is covered by a workplace retirement plan.

4. Should you contribute to a traditional IRA if it’s not tax-deductible?

Even if you can’t deduct your IRA contributions from your tax return, it might still be worth it to contribute. The primary reason is that you can still grow potential earnings tax deferred. But if you’re looking for alternatives, consider opening a Roth IRA or increasing contributions to your 401(k), especially if you have access to an employer match. 

5. What happens to a traditional IRA when you die?

Your traditional IRA will pass to your designated beneficiaries when you die. They will have the option to take account distributions over their lifetime or as a lump sum. If you don’t designate a beneficiary, your traditional IRA will go through probate, which can be a lengthy and expensive process.

6. Who cannot open a traditional IRA?

Individuals who don’t have earned income, like wages, salaries, or self-employment income, cannot open a traditional IRA. One exception is if you’re married and your spouse works. In this case, your spouse can contribute to a traditional IRA on your behalf when you file a joint tax return. This is known as a spousal IRA contribution.

The post What Is a Traditional IRA? appeared first on Stash Learn.

You’ve heard it before—it’s never too early to start saving for retirement. The earlier you start, the more comfortable you’ll be sitting on a beach with the rest of the snowbirds in Florida. But how do you start stashing away for your later years?

Individual retirement accounts (IRAs) are one of the most common types of investment accounts. If you’re debating between a Roth IRA vs. traditional IRA, you’ll want to consider the pros and cons of each. Both offer tax benefits, but they differ in important ways, including the timing of those tax benefits, accessibility of funds, and income limits.

Read along to learn the pros and cons of Roth vs. traditional IRAs to determine which is best for you.

Comparing Roth vs. Traditional IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account you fund with after-tax income. This is separate from an employer-sponsored retirement plan. You can reap tax benefits by keeping your money in the account until retirement age. Your money grows tax-free while in the account and you don’t pay any taxes on withdrawals after age 59½. Plus, you can withdraw funds you’ve contributed at any time without penalty (early withdrawals on earnings are subject to a 10% tax penalty).

Benefits of a Roth IRA

Saving for retirement with a Roth IRA can have some notable advantages.

1. Tax-free growth and earnings

In exchange for contributing after-tax dollars, your money grows tax-free. Basically, you pay your taxes on contributions up front, let your money compound, and then pay no taxes when you withdraw earnings after age 59½.

Note that this tax benefit is subject to the five-year rule: you must hold a Roth IRA for five years, or earnings you withdraw may be subject to taxes and penalties. If you have multiple Roth IRAs, once you satisfy the five-year rule for the first one you open, the IRS generally considers the rule satisfied for all of them, even those you opened more recently.

2. Withdraw contributions penalty-free

At any time, you can withdraw the money you’ve contributed without paying penalties or additional taxes. That flexibility can be helpful, but remember that it applies to contributions only; any earnings on your investments will usually be subject to taxes and penalties if withdrawn early.

3. No required distributions

Required minimum distributions (RMD) force you to make withdrawals from your account annually starting at a certain age. Roth IRAs don’t have RMDs, allowing your money to compound for as long as you like. You can even pass along the untouched money to your heirs, tax-free.

Disadvantages of a Roth IRA

When you’re considering a Roth IRA, you may want to take into account the potential downsides.

1. Contributions are not tax-deductible

Because you’re contributing after-tax dollars, your annual Roth IRA contribution isn’t tax-deductible at the end of the year, meaning your contributions don’t reduce your taxable income in the year you make them.

2. Taxes and penalties for some withdrawals

While you can withdraw contributions to your Roth IRA without penalty, you may owe income tax and a 10% penalty if you withdraw earnings before you’re 59½ years old. There are, however, a few exceptions to IRA withdrawal penalties.

3. Limited annual contributions

In 2024, Roth IRA contributions are limited to 7,000 per year until age 50, at which point you can start contributing up to $8,000 annually. If you earn less than the contribution limit, you can only invest up to the amount of your earned income for the year. Contribution limits may also be reduced based on how much money you make. See the next item.

4. Annual income limits

The IRS restricts your ability to contribute to a Roth IRA based on your income. For instance, single filers earning over $146,000 in 2024 are limited to making a reduced Roth IRA contribution. Once they earn over $161,000 (in 2024), they are not eligible to contribute to a Roth IRA at all. 

The contribution limit starts to reduce for joint filers when their earnings reach $230,000, and they are not eligible to contribute to a Roth IRA when they’re income reaches $240,000. Income in this case is measured by your Modified AGI (MAGI). 

There is a loophole for high earners to get around the income limit while still reaping tax benefits. This is known as a backdoor Roth IRA. This strategy allows individuals to make contributions to a traditional IRA and then later convert the account into a Roth IRA. Conversions aren’t subject to income thresholds but are still subject to contribution limits. You should consult with a financial planner or tax advisor before making a backdoor Roth contribution, because if done incorrectly it may result in an unwanted tax liability.

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What is a traditional IRA?

A traditional IRA is also a tax-advantaged individual retirement account, but it functions differently than a Roth IRA. You may contribute pretax dollars, and your investments grow tax-deferred until you withdraw them during retirement.

Generally contributions are tax-deductible which can lower your taxable income for the year. After age 59½, you can withdraw your contributions and earnings and pay income tax on your money at that time.

Benefits of a traditional IRA

For some investors, the benefits of a traditional IRA outweigh those of a Roth IRA.

1. Tax-deferred growth

Once the money is in your traditional IRA account, it grows tax-free. Earnings and gains are not taxed until you make a qualified withdrawal during retirement. This can be an appealing tax benefit because many people are in a lower tax bracket after they retire.

2. Tax-deductible contributions

Note that if your or your spouse are eligible to participate in an employer-sponsored retirement plan, like a 403(b) or 401(k), it can impact the deductibility of your traditional IRA contributions. As of 2024, single filers who are covered by a workplace retirement plan, and with incomes over $77,000 ($230,000 for married filing jointly) may face limitations on the amount they can deduct. For married individuals filing separately, the income threshold is notably lower; those earning over $10,000 might not qualify for a full deduction of their traditional IRA contribution.”

3. No income limits

Anyone with earned income can contribute to a traditional IRA, regardless of how much you make.

Disadvantages of a traditional IRA

A traditional IRA tends to be a bit less flexible than a Roth IRA. Depending on your circumstances, that might be a disadvantage.

1. Penalties for early withdrawals

Unless you qualify for an exception to early-withdrawal penalties, any withdrawals from a traditional IRA before age 59½ are subject to income tax and an additional 10% penalty. That applies to both your contributions and gains.

2. Limited annual contributions

The contribution limits for 2024 are the same as Roth IRAs: $7,000 or $8,000 if you’re over 50.

3. Required minimum distributions

As of 2023, RMDs must be taken from a traditional IRA each year once you turn 73. The RMD for each year is calculated by dividing the IRA account balance as of Dec. 31 of the prior year by the applicable distribution period or life expectancy.

Roth IRA vs. Traditional IRA: Key Similarities

IRA pop quiz: Check your knowledge

Test your knowledge of Roth vs. traditional IRAs by answering true or false to the following questions in this quick pop quiz.

1/4

Quiz

 

With which type of IRA do you pay taxes when you contribute money to the account?

Roth IRA

Traditional IRA

Roth IRA. You contribute to a Roth IRA with post-tax dollars and you contribute to a Traditional IRA with pre-tax dollars.

2/4

Quiz

 

Which type of IRA requires you to withdraw money from your IRA at a certain age?

Roth IRA

Traditional IRA

Traditional IRA. Traditional IRAs require you to withdraw a certain amount of money at a certain age, called a required minimum distribution (RMD).

3/4

Quiz

 

At what age are you required to withdraw required minimum distributions from your Traditional IRA?

59 ½

62 ½

67 ½

70 ½

70 ½. You got it! You’re required to withdraw RMDs at age 70 ½ if your birthday is before June 1, 2019, or age 72 if your birthday is June 1, 2019 or later. 

4/4

Quiz

 

True or False: You can have both a Roth and a Traditional IRA.

True

False

True. Just make sure you don’t exceed the annual total contribution limit.

 

Quiz

 

You scored 

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How to choose between a Roth vs. traditional IRA

You have many options when saving for retirement, and an IRA of any type could offer tax benefits. When deciding between a Roth or traditional IRA, ask yourself the following questions:

1. Am I eligible for an IRA? Do you meet the income requirements to open an IRA account?
2. How much can I contribute? Roth IRAs and traditional IRAs hold the same contribution limit. But if you can afford to max out on IRA contributions on an IRA, it makes the most sense to opt for a Roth IRA and avoid paying taxes later.
3. Am I close to retirement age? A traditional IRA might be best if you’re within five to 10 years of retirement. The tax-free growth benefit of Roth IRAs works better if you have a long time before retirement.
4. Do you foresee your IRA as a potential nest egg for heirs? Since Roth IRAs don’t require minimum distributions, you can pass them on to heirs. You cannot do this with traditional IRAs.
5. Do you want your IRA to benefit you now or later? Traditional IRAs offer immediate tax benefits since they count as tax deductions, putting more money in your pocket now but leaving you to pay taxes down the road. With Roth IRAs, you reap the tax benefits later. You have to decide whether you prefer the extra cushion now or later.
6. Do you want flexible access to your money before retirement, just in case? Roth IRAs allow you to withdraw penalty-free from your contributions five years after opening the account. With a traditional IRA, nonqualified distributions incur tax and a 10% penalty.

For many investors, a deciding factor is whether you want to pay taxes now or in the future. You may want to consider whether your annual income and tax bracket will likely be higher or lower when you retire than it is now.

• If you think you’ll be in a higher tax bracket when you retire, a Roth IRA may be right. Your tax rate will be lower now, and you can withdraw those funds, plus earnings, tax-free in retirement.
• If you think you’ll be in a lower tax bracket when you retire, a traditional IRA may be the right choice. You’ll get the tax deductions today and pay a lower tax rate on your money later.

Saving for retirement is generally a good idea, and the right investment option for you depends on your current circumstances and goals. The tax benefits of both Roth and traditional IRAs could help your investments grow, so whichever you choose may help you build a brighter financial feature.

FAQ

Still unsure about which type of IRA you should have? Let us help.

Can you have multiple IRAs?

As long as you meet the eligibility requirements, you can invest in both a Roth IRA and a traditional IRA. You can also hold multiple Roth IRAs or multiple traditional IRAs. However, your combined annual contribution to all your IRA accounts will still be capped at $7,000 or $8,000 if you’re over 50.

Can my employer match my IRA contributions?

Employers cannot contribute to your individual Roth or traditional IRA because they are set up by you as an individual, separate from your employer plan. However, your employer can offer a different type of IRA plan, including an employer match. Smaller businesses often use these plans to help employees save for retirement without the costs of more complex plans like 401(k)s.

• Payroll Deduction IRA: This allows you to contribute to your Roth or traditional IRA through direct deposit from your paycheck. There is no option for an employer match.
• Simplified Employee Pension (SEP): This type of IRA allows an employer to open and contribute to an IRA for you. You cannot make contributions yourself; all the funds come from your employer.
• SIMPLE IRA plan: These plans are designed for small businesses that want to offer an employer match. Your employer must make matching contributions; plus, they have to contribute some funds even if you don’t.

Which IRA is right for you?

Whether you should choose a Roth or traditional IRA depends on your circumstances and goals. A Roth IRA may work well for you if you want more flexibility with your money and anticipate being in a higher tax bracket when you retire. A traditional IRA may be a better investment option if you want tax deductions now and expect to be in a lower tax bracket upon retirement.

Once you’ve decided which IRA is best for you, you’ll need to set a retirement investment strategy. Try our retirement calculator for a guided look into how much you’ll need to retire and the monthly contributions to get you there.

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The post Roth vs. Traditional IRA: Which Is Best for You in 2024? appeared first on Stash Learn.

Are you one of the 36.8 million people contributing to a traditional IRA but making $150,000 or more? Did you know that high-income individuals can open a Roth IRA to save on taxes, even though the IRS technically doesn’t permit it?

It’s true. The IRS sets this rule to create a level playing field amongst lower-paid investors, but there’s a catch—you still can with a backdoor Roth IRA. Backdoor Roth IRAs are a loophole around Roth income limits.

And if you’re laughing to yourself, thinking that this strategy doesn’t apply to you, you never know what—or how many dollar signs—the future holds. If new career opportunities open up for you, you may find yourself in a higher salary bracket and unable to open a Roth IRA the typical way.

Follow along to discover the ins and outs of backdoor Roth IRAs, including how to start one and adhere to tax implications.

What is a backdoor Roth IRA?

Best for: single investors with an adjusted gross income (AGI) of over $153,000 and joint filers earning $228,000 or more

The backdoor Roth IRA is an investing strategy, not a true IRA type. In the grand scheme, a backdoor Roth IRA works the same as a regular Roth IRA but is funded differently and subject to a few tax particularities.

Anyone can open a traditional IRA—there are no income limits—yet high earners can’t open a Roth IRA without using a backdoor strategy. Reminder: the key distinction between Roth and traditional IRAs is taxes. Pre-tax dollars fund traditional IRAs, whereas Roth IRA contributions are after-tax.

The backdoor Roth strategy lets investors convert traditional IRA funds into Roth IRA investments and reap the tax benefits—tiptoeing around Roth income limits legally. As of 2023, the IRS does not crack down on this strategy.

Who qualifies as a high earner? In 2023, the IRS income requirements for Roth IRAs are:

• $153,000 for single or head of household filers and those married filing separately (and not living together)
• $228,000 for joint filers and qualifying widow(er)

Married individuals filing separately who earn $10,000 or less (and living with one another) also do not qualify for Roth IRAs. However, those in this income bracket should prioritize other financial goals, like increasing their incomes and building savings, before considering a backdoor IRA.

How to set up a backdoor Roth IRA

Backdoor Roth IRAs may seem intimidating, but they aren’t overly complicated to set up. Here’s a simple three-step guide to help you set up your backdoor Roth IRA.

1. Contribute to a traditional IRA

The first and simplest step of the backdoor Roth strategy is to open a traditional IRA. You can skip this step if you already have a traditional IRA. Some employer 401(k) plans may allow rolling funds into a Roth IRA. However, individual traditional IRAs typically fund backdoor Roth IRAs.

When opening a traditional IRA, pick a company you trust. You can either work with a brokerage or robo-advisor—both have advantages and disadvantages. However, if your sole strategy is to transfer to a backdoor Roth IRA, you may want to opt for assistance with a broker.

After you open the account, you can begin to contribute pre-tax dollars. You can contribute throughout the year or max out your contributions right away to begin the transfer process. Maxing out your contributions isn’t necessary, but it’s wise if you can afford it.

2. Turn your traditional IRA into a Roth IRA

Converting your traditional IRA into a Roth IRA should be simple. The first part of this step is to open a Roth IRA if you haven’t already. From there, each brokerage handles the transfer process differently—it could be the click of a button, or you may need to complete paperwork. Consult your broker to make sure.

Transfers are possible in one of three ways:

• Rollover: If you withdraw from a traditional IRA, you must transfer it to a Roth IRA within 60 days.
• Same trustee transfer: You plan to use the same financial institution to operate your Roth IRA that maintained your traditional IRA.
• Trustee-to-trustee: The financial institution holding your conventional IRA transfers a predetermined percentage of your assets to the new broker or bank maintaining your Roth IRA.

Keep in mind how much you want to transfer into the Roth IRA. You can roll over as much or as little as you’d like, though the more you convert, the higher your taxes will be.

Investor tip: Wait a few months after contributing to your traditional IRA before converting it to a Roth IRA. If you max out your traditional IRA and instantly convert it to a Roth, the IRS may see this as a single transaction and penalize you.

3. Pay taxes with the pro rata rule

Backdoor Roth IRAs aren’t a strategy for skirting taxes. Roth contributions are always after-tax, even with a backdoor approach.

The downside here is you can be taxed on your entire Roth contribution amount—including contributions and earnings from your traditional IRA. Backdoor Roth IRAs are subject to the IRS pro rata rule, which determines how pre-tax assets will be taxed upon transferring to an after-tax account like a Roth IRA.

The pro rata rule states backdoor Roth IRAs are taxed proportionately between pre- and after-tax contributions. It takes the percentage of your aggregated IRA balances and configures the percentage that still has yet to be taxed.

For example, imagine that you have $43,500 in a traditional IRA. Say you contributed the annual max of $6,500 to a new traditional IRA and then rolled that contribution only into a backdoor Roth IRA. To the IRS, you have $50,000 in traditional IRAs, but only 13% of your IRA total is after-tax dollars (from that last contribution). This means only $845 is tax-free (13% of $6,500), so you owe taxes on the remaining $5,655.

During tax season, you’re responsible for completing the backdoor Roth IRA tax form, the standard 8606 Form, to claim your nondeductible IRA contributions.

Additionally, if you benefited from a tax break from your traditional IRA contributions beforehand, you’ll be expected to repay those deductions. These tax stipulations may increase your taxes in the short term, but withdrawals are tax-free, so you will likely benefit in the long run.

Disclosure: This should not be construed as tax advice. Please consult a tax professional for additional questions.

Roth IRA: Withdrawals of the money (Contributions) you put in are penalty and tax free. Prior to age 59½, withdrawals of interest and earnings are subject to income tax and a 10% penalty. All earnings are tax free at age 59½ or older, assuming your first contribution was more than 5 years prior. Income Eligibility applies.

When shouldn’t you open a backdoor IRA

Backdoor Roth IRAs aren’t for everyone. This strategy can lead to unexpected costs or may not benefit you as you envision.

Here are a few examples of when it makes sense not to open a backdoor Roth IRA.

• If you’re allowed to contribute to a Roth IRA—there’s no reason to make investing harder than it should be
• If you have short-term financial goals, like paying off personal loans
• If you might need your savings within the next five years
• If you’re older than 60 and your backdoor Roth IRA could negatively impact your Social Security and Medicare benefits
• If your tax rate might be lower in retirement

FAQ

Not sure if a backdoor Roth IRA is right for you? Let us answer all of your remaining questions.

Are backdoor Roth IRAs still allowed in 2023?

Yes, backdoor Roth IRAs are legal in 2023, but that might not always be true. Since 2010, the IRS has allowed the backdoor Roth IRAs loophole. However, this could change in the future if the IRS changes violation determinations—and previous administrations have considered it.

Do you pay taxes on backdoor Roth IRAs?

Yes, you must pay taxes on a backdoor IRA. Traditional IRA contributions are tax-free. However, when you transfer your funds into a Roth IRA, those assets are viewed as contributions, so the entire amount is taxed—principal, earnings, and interest. However, you will not pay taxes again when you withdraw.

What is a mega backdoor Roth IRA?

A mega backdoor Roth IRA is a specific type of backdoor Roth strategy where maxed-out 401(k) employer plans fund the account.

Traditional 401(k) plans have a $20,500 annual contribution limit. However, some employers offer after-tax 401(k)s, which allow an additional $43,500 in annual contributions (totaling $66,000, including employer matching). Rolling both maxed-out plans into a Roth IRA is considered a mega backdoor Roth IRA.

Mega backdoor Roth IRAs can be tricky, even for the experienced investor. Consider turning to a tax professional to convert funds to a mega backdoor Roth.

Who qualifies for a backdoor Roth IRA?

Anyone eligible to contribute to a traditional IRA also qualifies for a backdoor Roth IRA. However, many people eligible for a traditional IRA also qualify for a Roth IRA, meaning the backdoor IRA strategy isn’t necessary.

Backdoor Roth IRA rollovers make the most sense for individuals earning more than the IRS’s income requirements. If your income is less than the IRS’s requirements, you can contribute directly to a Roth IRA and do not need the backdoor option (some may only qualify for a reduced contribution limit).

Are backdoor IRAs worth it?

Yes, a backdoor Roth IRA may be worth it if you’re not eligible, based on income limits, to contribute directly to a Roth IRA. While your assets can grow exponentially in a traditional IRA, you could save thousands in taxes by converting to a backdoor Roth.

Backdoor Roths aren’t as complicated as they sound. Tax season can make backdoor Roths a little tricky, but they’re still manageable as long as you fully understand how they work.

Investing made easy.

Start today with any dollar amount.

The post How to Set Up a Backdoor Roth IRA: A Step-by-Step Guide appeared first on Stash Learn.

Curious about investing but not sure what type of investment account to start with? From highly flexible brokerage accounts to tax-advantaged retirement plans to investing for your kids’ futures, almost every investor can find an account type that fits their needs. And you don’t have to pick just one. The key is choosing accounts that are right for your financial goals.

One thing to keep in mind: Investment accounts are not the same as savings accounts at a bank. The assets in any investment account could grow significantly over time, but investing always involves risk, including the risk that you could lose money.

In this article, we’ll cover:

• Brokerage accounts
• Individual retirement accounts
• Employer-sponsored retirement accounts
• Custodial accounts
• Education savings accounts

Brokerage accounts

When people say “brokerage account,” they usually mean a highly flexible investment account that allows you to choose from many types of investments, trade the securities you want to own and withdraw money whenever you wish. Here’s an overview of how they work:

• A brokerage firm, or broker/dealer, is a company offering financial services; you open your account with the brokerage, and they execute trades on your behalf. Brokerage firms come in many forms, from brick-and-mortar in-person service online-only platforms or apps. Your brokerage may offer other services too, like an online robo-advisor or financial advising.  
• A broker is a licensed professional who can trade on your behalf. They work for a brokerage firm and typically charge a commission or other fees for helping to manage your money. You might not necessarily work with an individual broker at your brokerage firm; it’s common for people to use a robo-advisor or manage their investments themselves at online and app-based brokerages.
• A brokerage account is the individual investment account you open with a brokerage firm. You put money into your account, and the brokerage invests it as you wish. If you want to buy or sell any securities, you request the trade and the brokerage enacts it.  If your account earns profits, dividends, or interest, you’ll likely owe taxes on that money 

A point of clarification: almost every type of investment account is held by a brokerage firm, even accounts with more restrictions, like an IRA or a custodial account. That’s because only brokers can interface directly with the stock market. They enable individual and institutional investors to buy and sell securities, like stocks, bonds, exchange traded funds (ETFs), mutual funds, and more. You interact with the brokerage, and the brokerage trades on the stock market on your behalf.

Cash account

Cash brokerage accounts are funded with your money: if you deposit $100, you can invest up to $100. In many cases, you can get started with just a few dollars. You can invest in whatever securities your brokerage offers; in addition to stocks, bonds, and funds, some brokerages offer access to commodities like gold and newer investment vehicles like cryptocurrency. 

Margin account

With a margin account, you can invest your own money, as well as borrow money from your broker to buy securities. You must pay back the loan, plus interest, even if your investments lose value. In some cases, the brokerage can force you to sell your investments to cover your debt. Margin accounts usually represent a significant risk to investors. 

>> Learn more about brokerage accounts 

Individual retirement accounts

Individual retirement accounts (IRAs) are tax-advantaged accounts that help people save for retirement. You can invest your contributions in almost any security, and investment returns grow tax-deferred while they remain in your account. There is typically a penalty for money taken out before age 59½, but there are a few exceptions. There are two main types of IRAs: traditional and Roth. 

>>Learn more about IRAs

Traditional IRA

With a traditional IRA, your contributions may be tax-deductible. This can reduce your taxable income, which might lower your overall tax bill in any given year. Any investment returns accrue tax-deferred and at 59½, you can begin making withdrawals. You’ll typically owe tax on the money you take out. If your tax rate is lower when you withdraw than it was when you contributed, you might reap tax savings. 

If you take out money before age 59½, you’ll have to pay an extra penalty tax unless you qualify for an exception. And when you turn 70½, you’re required to start taking distributions; you’ll owe additional tax if you don’t.

>>Learn more about traditional IRAs

Roth IRA

Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars. Qualified distributions made after you turn 59½, however, are tax-free. That means any money you earn on your investments is also tax-free. If you expect to be in a lower tax bracket earlier in your career and a higher tax bracket close to retirement, a Roth IRA could help you save on taxes. Roth IRAs can also provide more flexibility when it’s time to withdraw, as you may be able to take out your principal investment without penalty prior to age 59 ½, and there are no required minimum distributions like traditional IRAs impose.  

>>Learn more about Roth IRAs

Employer-sponsored retirement accounts

There are a few types of investment accounts offered by employers to help their employees with retirement savings. They typically offer tax advantages, and employers often make a matching contribution on your behalf. These retirement accounts usually have higher contribution limits than IRAs, but investment options tend to be much more limited.

>>Learn more about employer-sponsored retirement accounts. 

401K

A 401(k) plan is a retirement account that can be offered by private companies. Employees commonly contribute with pretax dollars, lowering their taxable income, though Roth and after-tax contribution options may also be available Employers may match employee contributions up to a certain amount, so many employees contribute at least enough to get the employer match. In many cases, these plans have a “vesting” schedule, meaning that employees do not fully own the employer’s contributions until they have worked there for a certain amount of time. 

Money in the account contributed on a pre-tax basis, including any investment returns, is not taxed until it’s withdrawn. If you expect to be in a lower tax bracket when you retire, you might save money on taxes. Funds withdrawn before age 59½ are subject to an extra penalty tax in most cases. Like traditional IRAs, 401(k) plans have required minimum distributions.

Roth 401K

Roth 401(k)s have different tax advantages than standard 401(k)s. Like a Roth IRA, contributions to a Roth 401(k) are made with post-tax dollars, but qualified distributions are tax-free, including investment returns. If you expect to be in a higher tax bracket when you retire, a Roth 401(k) could offer substantial tax savings.

403(b)

Only private employers can offer 401(k) plans. Nonprofits and some government employers can offer a similar plan: the 403(b). 403(b) plans are also called tax-sheltered annuities.

Like 401(k)s, 403(b) plans allow you to make contributions of pre-tax money, and employers often offer matching contributions. You can generally take qualified distributions after age 59½, and will owe taxes on your money at that time; nonqualified distributions come with a 10% penalty. 403(b) accounts also have required minimum distributions.

Custodial accounts: investment accounts for kids

A custodial account is a type of investment account for a child. A parent or other adult is the custodian; this person makes investment decisions and often funds the account. The assets in the account belong solely to the child, but the child cannot withdraw money until they reach the age of majority, which varies from state to state. Nevertheless, the account may be considered the child’s asset in financial aid calculations, potentially limiting the aid available to them. Additionally, any income from a child’s custodial account belongs to the child, so if income exceeds a certain threshold, you’ll need to file a separate federal income tax return for the child. The custodian, however, can use the money for the child’s benefit. 

>>Learn more about custodial accounts 

Uniform Gifts to Minors Act (UGMA)

UGMA accounts are custodial investment accounts that allow an adult to transfer assets to a child without establishing a formal trust. The account can contain stocks, bonds, and other securities. It’s managed by the custodian until the beneficiary reaches the age of majority; at that point, the beneficiary can use the money without restriction. Before that, the custodian can use the money for the child’s benefit. UGMA accounts will likely be treated as the child’s asset for purposes of financial aid, which might lower the amount of aid available. 

While UGMA investment returns are not tax-free, in some cases they are taxed at the minor’s tax rate, or the “kiddie tax,” which may be lower than the custodian’s. Contributions are made with post-tax dollars, but individuals can contribute up to $16,000, and married couples up to $32,000 per year, without triggering gift tax.

Note: UGMA is a federal law that states can adopt. While all states have done so, some have made amendments. You’ll want to learn the details of your state’s UGMA implementation before making investment decisions. 

Uniform Transfers to Minors Act (UTMA)

UTMA largely aligns with UGMA: it allows adults to open a custodial account to transfer assets to children without establishing a trust, requires a custodian, may impact the child’s access to financial aid, and passes to the child without restriction at the age of majority. But UTMA extends UGMA to allow investments in more asset types, including real estate, paintings, patents, and royalties. UTMA also allows some flexibility for gifted assets to reach maturity dates, like bonds, even after the minor comes of age. 

UTMA is another federal law that states can choose to adopt. Most have adopted it, but not all, and some have amended it. It’s important to understand your state’s UTMA before making investment decisions. 

Custodial IRAs

Any individual can contribute to an IRA if they have earned income. Thus, children with earned income can fund IRAs to get a head start on retirement planning. Other people can contribute on the child’s behalf, as long as the total does not exceed the child’s earned income. A child’s IRA, however, must be set up as a custodial account.

Custodial IRAs can be traditional or Roth, and the contribution tax rules are the same as adult IRAs. For children, Roth IRAs can be especially attractive because contributions are made with post-tax dollars, at a time when a child’s tax rate is likely low. Then any investment returns grow tax-free, and any qualified distribution is also tax-free.

Investment accounts for education

The funds in UTMA and UGMA custodial accounts can be used for any purpose, though people often use those types of investment accounts to save for education. However, there are certain custodial investment accounts specifically designed for educational expenses: 529 college savings plans and education savings accounts (ESAs). These accounts offer special tax advantages, but they feature more restrictions on how the money can be used.

529 college savings plan

A 529 plan is a savings and investment account for college, K-12 education, and some apprenticeship programs. The most common type is the college savings plan; contributions can grow tax-free and be withdrawn tax-free for qualified educational expenses. The 529 prepaid plan, in contrast, allows adults to prepay in-state public tuition in hopes of locking in a lower rate. 529 plans are usually operated by states and can vary significantly from state to state. 

Education savings account (ESA)

An ESA, sometimes called a Coverdell education savings account, is another type of investment account for educational expenses; the beneficiary must be under 18 or be considered “special needs.” The funds can be used for college or K-12 expenses. Contributions are made post-tax, but assets can grow tax-free, and distributions for qualified educational expenses are tax-free. Withdrawals made after the beneficiary turns 30 will incur penalties and taxes.

Finding the right type of investment account for you

With so many types of investment accounts, it might seem daunting to decide which kind you want. They all have different levels of flexibility, potential tax advantages, and limitations. So it’s all about lining up your goals with the type of investment account that best supports them.

The good news is, that you don’t have to choose just one way to invest. It’s not uncommon for people to have one or more retirement accounts to take advantage of tax benefits, a brokerage account to grow money at a faster pace than inflation, and an account to save for their kids’ education. Investing can be a way to build wealth for the future, whatever your goals; with all the types of investment accounts out there, you can find the right approach for the future you want to build. 

The post Types of Investment Accounts appeared first on Stash Learn.

Namely, gains—also called earnings—in traditional retirement accounts grow tax-deferred as long as you don’t make any withdrawals from the accounts prior to age 59 1/2.² Important note: All investing involves risk, and you can lose money with your investments. Gains are not guaranteed. 

What happens if you sell from a retirement account?

But if you sell some of your investments and withdraw the money prior to reaching the age 59 ½, the money you take out will be subject to regular income taxes, plus an additional 10% early-withdrawal penalty. Similarly, if you decide to close the account and sell all of your investments, you may have to pay the same penalty in addition to income taxes on the entire amount.

What about Roths?

There are some exceptions to this rule. Roth accounts are funded with post-tax dollars. You can withdraw contributions you’ve made at any time, without taxes or penalties before retirement age. You may, however, have to pay taxes and penalties if you withdraw any of your earnings prior to a five-year holding period.³ 

Good to know: The Internal Revenue Service (IRS) may waive the 10% penalty for early withdrawals from retirement accounts if you become permanently disabled, or to pay for medical expenses that exceed 7.5% of your income. Find out more from the IRS here and here.

Follow the Stash Way

Stash encourages you to follow the Stash Way, our investing philosophy which includes investing regularly, and investing for the long run. Planning for retirement is also a critical part of your financial plan. If you must close your brokerage account, consider something called a rollover, which means you transfer your retirement account from one financial institution to another. There aren’t likely to be any tax penalties or consequences for that. 

You can learn more about 401(k)s and IRAs here.

The post What Happens When You Sell From a Retirement Account? appeared first on Stash Learn.

Whatever your retirement dream is, retirement itself is a pretty straightforward concept. For most people, it’s simply the age when you stop working. 

But in order to stop working, you need income. And generally speaking, for most people, income in retirement will be limited to your savings, pension (if you have access to one), and Social Security.

Passive income could add to your income once you’ve retired. 

What is passive income? 

As its name suggests, passive income is generated without active, daily participation from you. It could be money you make by owning an apartment and collecting rent from your tenants. It could also be earnings or dividends from your investments in the stock market.  Or it could even include royalties you make from selling a book or acting in a commercial. 

What kinds of passive income can you earn in retirement?

Here are some ideas:

• Investing in stocks that pay out dividends, or distributions of a company’s earnings, is one way to earn money on the side. When you get a dividend, you get a certain amount of the profit the company distributes to its shareholders. That amount is determined by how many shares you have. Dividends are usually paid out in cash (occasionally additional shares of stock are issued). And these payments usually occur four times a year, at the end of every quarter. 
• Retirement accounts, such as Individual Retirement Account (IRA) and 401(k), can help you develop passive income through earnings and dividends from investments held inside the accounts. 
• In 2019, 65% of consumers owned a home in the United States. Renting out property to tenants or travelers can be a source of income. There are a few things to consider before you invest in property, however. Unless you can purchase the property with cash, you should have some savings as you’ll have to put a down payment on the house if you get a mortgage.  Typically, you can expect to pay around 20% of the purchase price of the house as a down payment. Then you’ll have to pay off the mortgage on the house, assuming you don’t plan to purchase it outright.
• Maybe you’ve been sitting on the next great novel. If you have a manuscript, you may want to attempt to get your book published as either an ebook or as a print edition. 
• You can earn royalties, or a percentage of sales, on a book. While the percentage of sales will depend on the book deal you have, you can estimate what you might earn from royalties. You can also earn extra income by appearing in commercials, or movies, or tv shows.

Retirement accounts and passive income

Anyone earning income may be able to put money into either a traditional or Roth individual retirement account (IRA). Saving money in an IRA could potentially help you develop passive income in retirement.

You can contribute up to $6,000 a year to any type of IRA. (That amount jumps to $7,000 if you are 50 and older.) And you can actually split your contribution between both types of account, as long as you don’t go beyond the annual contribution limits. 

With a traditional IRA, you’re taxed on money you withdraw from the account. However, you may not have to pay income tax on the money you contribute to a Traditional IRA and any earnings your investments generate aren’t taxed until you withdraw the money.

With a Roth IRA, taxes work the other way around. You pay tax on any income you contribute to the account. After that point you don’t have to pay any tax on that money or on any of its investment gains—You’ll be able to withdraw your contributions (not your earnings) at any time tax and penalty free as long as you stick to some basic rules. And there is no RMD age, meaning you don’t have to pull money out of the account, and earnings can continue to accumulate. 

You can find out more about IRAs here. 

Some things to keep in mind

Retirement can be challenging, and most people haven’t saved enough to make it a reality. In fact, nearly half of all people in the U.S. have saved less than $100,000 for retirement, according to reports. Many estimates say you may need more than $1 million in savings to live comfortably once you’ve stopped working.

Increasing monthly income with passive income, even by a little bit, could potentially help you in retirement.

The sooner you start saving for retirement, the more time can help you. And your retirement savings, which could include dividends and earnings, can be part of your passive income strategy.

The post Planning to Retire? Here’s How Passive Income Can Help appeared first on Stash Learn.

It’s not as far fetched as it sounds. In fact, the odds are increasingly in your favor. A record number of individual retirement accounts (IRAs) and 401(k) accounts now hold $1 million or more, according to a new study by the brokerage firm Fidelity. It found that 441,000 of the IRA and 401(k) accounts that it manages held $1 million or more as of the fourth quarter 2019. The fourth-quarter total marks a 15% jump compared to the from the third quarter of 2019, when 382,400 retirement accounts held $1 million or more—a record at the time. 

Also on the plus side:  The average amount saved in a 401(k) or IRA increased 7% between the third and fourth quarters of 2019. Fidelity customers had an average of $112,300 saved in 401(k)s for the fourth quarter of 2019, up from $105,200 in the third quarter. Customers had an average of $115,400 saved in IRAs, up from $110,200.

(A higher number of 401(k)s had $1 million or more, compared to IRAs. A total of 233,000 401(k) accounts held $1 million or more while 208,000 IRA accounts held $1 million or more.) 

Fidelity is reportedly one of the largest retirement account providers, with a combined 27 million 401(k) and IRA accounts. 

What does it take to be a millionaire?

There are nearly 19 million millionaires in the United States, more than in any other country. Yet, the number of millionaires in the U.S. accounts for less than 1% of the population. 

Financial advisors and retirement organizations including the AARP often suggest that a range of $1 million to $1.5 million is a benchmark for retirement savings. While more 401(k)s and IRAs than ever have $1 million or more at Fidelity, only 1.6% of the accounts there hold $1 million or more.

What you need to have saved for retirement varies from person to person. Either way, it is important to know your goal for retirement savings and to account for those savings in your budget.

401(k)s vs. IRAs

While you plan for retirement, it is important to know the difference between the types of accounts.

A 401(k) is a qualified employer-provided retirement plan, meaning it satisfies federal tax guidelines for such plans. Often, an employer will provide this plan to employees with an additional perk, called a matching contribution. This means that employers match the funds you place into your account, generally up to a certain percentage, potentially allowing you to save more, faster.

As of 2020, you can contribute up to $19,500 annually to your 401(k) if you’re younger than 50 years old. You can contribute an extra $6,500 per year if you’re 50 or older.

When you contribute to your 401(k), you contribute pre-tax income. Once you start withdrawing from your 401(k) in retirement, typically at age 70½, you will pay taxes on that income.  

An IRA, on the other hand, is an individual retirement account that anyone who earns income can open up through a brokerage or financial institution. There are two types of IRAs: Traditional IRAs and Roth IRAs. 

Traditional IRA accounts provide some tax advantages, as your contributions are made from your income on a pre-tax basis.  Account owners pay taxes on the funds when they withdraw them.

You can contribute to a Roth with income after taxes have been deducted. In contrast to a traditional IRA whose withdrawals are taxed, Roth investors generally don’t pay taxes on withdrawals once they’ve reached retirement age.

As of 2020, you can contribute up to $6,000 annually to an IRA if you’re younger than 50 and up to $7,000 annually if you’re 50 or older.

Good to know: It’s probably easier to save $1 million or more in a 401(k) than an IRA. A 401(k) lets you put away more money, and if there’s an employer match on funds, it can all really add up over time.

IRAs are available to most people who earn an income, letting you put money away in an investment account on a tax-favorable basis. Since there’s no one matching your contributions, you may have to save more aggressively over time to get to your magic number.

Start saving early

The sooner you start saving in a retirement account, the more money you’re likely to have over time, thanks to a market principle called compounding. (You can find out more about how time in the market and compounding can help you here.)

If you haven’t started planning for retirement yet, it may be time to start planning. Try Stash’s retirement calculator to figure out how much you might need to retire and visit Stash Retire to assist in planning.

The post How You Could Become the Millionaire Next Door appeared first on Stash Learn.

In fact, about 73% of taxpayers got money back from the Internal Revenue Service (IRS) in 2019, and the average refund for 2019 was about $2,700, according to the IRS.

And while people have a range of plans for that money—from purchasing a big-ticket consumer item such as a car, or refrigerator, to paying down debt—it might surprise you to learn that many consumers saved and invested their refunds in 2018, according to recent research.

Here’s what taxpayers did with their refunds in 2018:

Retirement saving

Stash believes in smart saving and investing, and we think one of your goals should be saving for retirement. Why? About one-third of U.S. consumers have $5,000 or less saved for retirement. (Various estimates suggest you may need as much as $1.5 million to support 30 years without working.)

Additionally, fewer of us are likely to have pensions, and Social Security probably won’t cover your expenses after you’ve stopped working.

Meanwhile, career paths are likely to be unpredictable, and healthcare costs probably will be expensive when you can no longer work.

But the sooner you start investing for retirement, the more money you can potentially accumulate.

Waiting even a few years can dramatically reduce your retirement savings. The following chart shows the difference in your potential nest egg if you start at 25 compared to 35. The person who waits ten years might have almost half as much money in retirement.

Consider Stashing it

Stash offers both traditional and Roth individual retirement accounts (IRAs). The maximum you can contribute to your Stash retirement account in 2020 is $6,000.  People who are age 50 and older can contribute an additional $1,000 each year as a catch-up contribution.

Have a tax refund coming your way? Consider stashing it in a Stash Retire account.

The post How to Use Your IRS Refund To Jumpstart Your Retirement Savings appeared first on Stash Learn.

Tucked away in the $1.4 trillion spending bill that Congress passed at the end of 2019 is something called the SECURE Act, short for “Setting Every Community Up for Retirement Enhancement.” The act will increase the age at which retirees are required to start taking money out of retirement accounts such as IRAs and 401(k)s. It also eliminates age limits for making contributions to these plans.

The changes could help to address a retirement savings crisis, according to reports, as well as provide more time for people to save as they live longer and work longer.

Changes for 2020

Here’s a look at what’s changing for retirement plans, starting in the 2020 tax year:

RMD age increase: The new law increases the required minimum distribution (RMD) age to 72, from age 70 ½. An RMD is an amount you’re required by tax law to take out of a retirement account each year, based on an Internal Revenue Service (IRS) formula, once you’ve reached that age. The new law applies to people who will turn 70 ½ after December 31, 2019.

Repeal of age limit for contributions: Previous rules allowed people to put money into their retirement accounts until age 70 ½, after which the IRS required them to withdraw money. The new law removes this age restriction, and lets people contribute as long as they earn income from wages.

Annuities: The law will allow employer-sponsored workplace retirement plans to offer annuities. Annuities, which are contracts between insurance companies and investors, can provide a fixed amount of income in retirement, but generally require monthly or bulk payments over a period of time before payouts begin. Annuities are considered somewhat controversial due to their expenses and often limited payouts, according to some experts.

The law has additional provisions that could help consumers in other ways.

For example, people will now be able to  use up to $10,000 from a 529 account to repay student loan debt. A 529 is an education savings vehicle that allows consumers to save and invest money on a tax-deferred basis. Similarly, people will be able to withdraw up to $5,000 penalty free from an IRA or 401(k) for expenses related to the birth or adoption of a child. (Consumers will still have to pay taxes on the withdrawn amounts, according to reports.)

The changes to IRA and workplace retirement plans follow IRS contribution limit increases to 401(k)s for 2020.

More about retirement accounts

IRAs and 401Ks are both tax-advantaged retirement accounts that could help you save for retirement.

You typically have access to a 401(k) through an employer, who may also provide an employer-match benefit, whereas anyone can open an IRA by setting up an account at a bank or brokerage.

Both accounts can allow you to save for retirement by investing in products such as CDs, stocks, bonds, and other securities. Both IRA’s and 401(k)s come in two flavors—traditional and Roth.

You can learn more about 401(k)s and IRAs here.

Save for your future

Saving for retirement can be an important part of a comprehensive financial plan, which can also include setting short-term and long-term goals for your money. Short term goals can include creating a budget, setting up a savings account for unexpected expenses as they arise, as well as building an emergency fund with three to six months worth of expenses for unexpected life events such as medical bills or layoffs.

Longer-term goals can include investing, and saving and investing for retirement.

Check out Stash’s financial checklist for 2020 to help you get started planning your financial life this year.

The post What’s Changing for Retirement Accounts in 2020 appeared first on Stash Learn.

But perceptions may soon change. In addition to becoming the most populous generation in the U.S., millennials will soon become one of its wealthiest groups.

A new report from the real estate company Coldwell Banker says the millennial generation now has 618,000 millionaires (nearly half of them in California), and they are expected to inherit a staggering $68 trillion from their Baby Boomer parents. The Baby Boom generation is considered the richest in history.

And this year, the number of millennials will also increase to 73 million, while the number of Baby Boomers—previously the largest generation—will decrease to 72 million. Meanwhile, by 2030, millennials in the U.S. are expected to control $20 trillion of wealth, five times what they have today, according to a new report from venture capital research firm CB Insights.

Apart from being a huge generational group, millennials are also a big opportunity for businesses, as they are currently one of the largest consumer segments.

Here’s a closer look at who millennials are:

• Millennials had a collective buying power of approximately $600 billion annually in 2017, an amount that’s estimated to more than double by 2020, according to business consultancy Accenture. Their purchases make up about 30% of all retail sales, according to the study.
• Millennials are more likely to purchase things on impulse, according to other consumer research, and they are more likely to purchase things using subscription plans, such as beauty products, meal plans, and apparel services. As opposed to one-time purchases, subscription plans insure a continuous stream of income for the companies that offer them.
• Helped by low-interest rates and aging into their peak buying years, millennials are also expected to fuel a new wave of home and car buying, as they shift away from more discretionary, or smaller, purchases such as iPhones, microbrewery beer, and—yes—avocado toast.

Millennials also struggle financially

The Coldwell Banker report contrasts with other data that suggests millennials struggle to find jobs and have high amounts of student loan debt, as well as low home-ownership rates, among other difficulties.

• The average millennial reportedly earns about $35,000 annually and has $30,000 of student loan debt.
• Homeownership rates for millennials, who are currently between the ages of 25 and 34, are actually about 8% lower than older generations when they were the same age.
• Millennials, especially men of this generation, have a higher unemployment rate than the national average.

The generations defined

Each generation has its own characteristics, but sometimes these are turned into stereotypes, often for marketing purposes.

The post Want to Be a Millennial Millionaire? appeared first on Stash Learn.

In this season of goblins, demons and pumpkin spice, nothing induces a blood-curdling scream as quickly as a bill for that credit card with the super-high interest rate, or that automatic monthly debit for the gym you never use.

But fear not: As one well-versed in the art of awful money choices, I am here to help you bust the spooky spirits groaning and moaning in your financial life.

Haunted by: pricey student loans

Student loan debt can be quite a nightmare. It’s true that a useful education is a fine investment. But perhaps you took out a student loan you didn’t really need, over-borrowing to cover some not-so-necessary expenses like that luxurious California king futon from grad school. Or perhaps you’ve simply been screwed by a company that preyed on your lack of financial education to lock you in for what feels like a lifetime of debt. This isn’t about shame or blame—it’s about looking at what happened and dealing with it in the present day.

There are various methods for reducing your burden, but first, make sure you actually know what all your loans are. (Ordering a free credit report is one way to find out.)

Here are just a few ways that may help ease your burden:

Pay more than the minimum
It may seem impossible. But chances are you can pay a tiny bit more each month, and lessen the length of your unholy marriage to the student loan company. Here’s an example, citing information from the financial lender Sallie Mae: “If you owe $10,000 and have an interest rate of 8% annually, it will take you ten years to pay off your loan, assuming minimum payments of $121.32 a month…But if you bump up your monthly payment to $141.32 (just $20 more), you’ll pay off your loans in eight years, or two years earlier, and will save yourself close to $1,000 in interest payments.”

Make extra payments
Again, may seem impossible. But what if you assemble $20 worth of couch change and car change and back pocket dollar bills gleaned from the laundry? That’s an extra payment. Get some money back at tax time? That’s an extra payment. Sell your clothes at the consignment shop or on eBay? That’s an extra payment. It all adds up.

Also, remember to include your student loan interest with your annual taxes, as you may be able to deduct some or even all of it.

Haunted by: too many credit cards

You know how gremlins multiply? Yeah, that. Some financial coaches will tell you to pay as much as you can each month on your card with the highest annual percentage rate, and then stick to the minimum on the other cards until you’ve got that big guy paid off. Others encourage you to pay off the lowest balance first, using the debt snowball method.  You can see if any of your cards has a 0% APR balance transfer offer, and shift some money accordingly. There may be fees involved even if the APR is 0%, so be sure to check with your individual credit card company. You can expect to be charged 3 to 5% of the amount you’re transferring. Once you’ve got a card paid off, you may wish to cut it up but leave the account open. Part of your credit score is determined by the length of your active accounts. But ultimately you’ll probably continue accruing debt as long as you keep using those credit cards. If you need help with debt like this, consider a program like Debtors Anonymous.

Haunted by: skipping the 401(k)

So you never enrolled in a 401(k) and matching funds when you had the opportunity. Or you’re an independent contractor without any retirement savings. Hey, it’s never too late to start! Educate yourself on options for retirement savings—opt into your company’s plan, choose your own IRA, or enroll in another type of fund—and put in a little bit each month as a start.

An IRA is available to almost anyone with a taxable income, and can be a particularly great option for a freelancer/independent contractor. A Traditional IRA allows you to make regular contributions on a pre-tax basis. You’ll have to pay taxes on the total amount when you withdraw – but you’ll be hit with major fees if you withdraw before the age of 59 ½. A Roth IRA is a bit different – you can make contributions after taxes have been deducted. You generally won’t have to pay taxes or fees when you make a withdrawal, so long as you’re 59 ½ or older.

Thanks to the power of compound interest, your relatively small contribution to a retirement fund can yield big savings over time. After all, a little Halloween candy in your puffy paint-decorated pillowcase is better than none.

Haunting by: recurring debits for stuff you don’t use

Around here, we call it sleep spending. Maybe you’re not that into your meditation app, or your gym, or those boxed meal kits you never actually use. Quitting is (usually) relatively easy. Granted, your gym will probably push back at you if you’re locked into a one year program, but a relentless dedication to polite but firm communications with customer service can often at least knock a few months off the thing.

Looks like it’s your turn to haunt somebody, baby!

The post Are Spooky Financial Ghosts Groaning In your Attic? appeared first on Stash Learn.

And there’s so much else that requires money now—like paying your monthly living expenses, or your student loans and credit card debt, or maybe your mortgage.

But putting money away regularly for retirement, even if it’s a small amount at first, can really pay off over time.

Saving with Stash’s retirement calculator

Check out Stash’s new retirement calculator, which will help you determine how much you might need to save each month to reach your retirement goals.

Getting started is easy:

Step 1. Learn about your options.

Not everyone has an employer-sponsored 401(k) plan to help them save for retirement.

But that’s okay! Stash Retire allows you to sign up for a either a traditional or Roth Individual Retirement Account (IRA), which will let you put up to $6,000 away annually. Individuals who are 50 or older are eligible for catch up contributions, which entitles them to put an extra $1,000 away every year.

Good to know: You can contribute to both an IRA and a 401(k), as long as you don’t go beyond the contribution limits for both during the calendar year.

Learn the difference between a 401(k) and an IRA here.

Step 2. Set it up.

Because you’ll be building your nest egg for years, you’ll want to make sure your portfolio has the right mix of investments, and one that suits your individual level of risk. Some investors like more risk and will load up on stocks and stock funds. Others like less risk, and might have more cash and bonds.

But whether you like more risk or less, you should always aim to diversify. In fact, diversification is part of the Stash Way. By diversifying,  you’ll hold a variety of investments that are not all subject to the same market risks, including stocks, bonds, cash, and commodities.

You’ll also be choosing investments in numerous economic sectors—not just the hot industry of the moment—as well as in different geographies around the globe. We offer exchange-traded funds (ETFs) which can help make diversification easy.

Confused? Don’t worry, when you set up a retirement account on Stash, we recommend funds for you based on how many years you have until you stop working.

Special note: All investing involves risk, and it’s possible to lose money by investing in stocks, bonds, and other securities. Find out more about investment risk here.

Step 3. Automate it.

An easy way to grow your retirement fund is to automate your savings. If you’ve budgeted properly, you should know how much money you have to save and invest each month.

Consider putting a portion of your savings into investments, and invest consistently over time. Any number of online tools will help you do that automatically.

Stash lets you automate saving and investing with its Auto-Stash tools.

Stash on!

The best time to start saving for retirement is today.

You don’t need a lot of money to start investing. Stash lets you start investing for just $5.

The post Got Retirement Goals? Stash Can Help You Get There appeared first on Stash Learn.

Maybe you’ve just graduated from college, or rented your first apartment with friends. Life’s an adventure filled with so many possibilities, and it’s all about discovering who you are in the world.

But the sooner you start investing, the more time you give your money to grow—and the easier it might ultimately be for you to meet your long-term financial goals.

To help you get you off the sidelines, here are a few tips for investing while you’re young.

Jump in

With investing, you can learn by doing. It’s a little bit like learning to play a new sport or instrument.

Imagine if you wanted to kayak the Colorado River. You’d start by paddling on lakes and then progress to class I and II rivers, before moving up to more difficult whitewater. Eventually, with enough practice and experience, you might be ready to tackle the rapids of the Colorado River.

Investing is very similar. And as a young investor, you have the advantage of more time to study the markets, refine your investing strategies, and to learn from both your successes and failures.

The important thing is to take the first step.

Embrace compounding

If you invest while you’re young, you’ll also be able to take full advantage of the power of compounding as you build wealth over the next four, five, even six decades.

In simplest terms, compounding is any return earned on your principal, plus your past returns. For example, if you have money in a bank account, it’s the interest on that sum plus the past interest it has earned over time. If you have money in an investment account, it’s the percentage you may earn on top of your original investment, plus its previous earnings.

The sooner you start, the more time compounding can work in your favor.

The following chart* shows what would happen if you invested $6,000 annually until retirement at age 65, starting at age 25 compared to age 35, assuming an annual return of 5%.

Build saving into your budget

If you haven’t created a budget, now’s the time to start.

Not only can a budget help you determine how much you have for essential costs such as rent, student loans, groceries, and transportation, it can also show you how much you have left over to save each month.

While experts recommend putting away as much as 20% of your take-home pay into savings, if that’s too much to start out with, try a smaller amount. The point is that you put something away each month. (Find out more about setting a budget here.)

Once you’ve set up a cash buffer of between three and six months worth of savings in both a rainy day and emergency funds, then you can start thinking about investing.

Tools like Auto-Stash can help automate your investments, so you never miss a month.

Retirement savings accounts

Want to relax in your older age? If you’re investing for the long term, you should seriously consider putting money into a retirement account.

IRAs are tax-advantaged retirement savings accounts that can help you build a nest egg. There are two main types of IRAs—traditional and Roth—and the main difference between the two is when you pay taxes on the contributions and earnings.

With traditional IRAs, you make tax-deferred contributions, and then pay taxes when you take money out. With a Roth, you pay taxes on contributions, but withdrawals later on are typically tax-free.

The contribution limits for 2019 are the same whether you have a traditional or Roth IRA: you can contribute up to $6,000 each year (that bumps up to $7,000 a year if you’re age 50 and up).

If you have an employer-sponsored plan, such as a 401(k), consider contributing to this as well. (Generally speaking, you can contribute to both an IRA and a 401(k) in the same year, however, you may not be eligible for the full tax advantages of both accounts.  You can put away as much as $19,000 a year in a 401(k), and catch-up amounts of an additional $6,000 once you turn 50. Similar to a traditional IRA, your contributions to a 401(k) are tax-deferred.

Follow the Stash Way

Our investing philosophy is simple, and we’ve boiled it down into three basic steps that we call the Stash Way:

• Invest for the long term
• Invest regularly
• Diversify

Over the years, market gains have outpaced standard savings rates in bank accounts. Looking ahead, experts expect markets to return about 5%. With the power of compounding and regular investing, you have the ability to build wealth for the financial future you want.

And by diversifying,  you’ll hold a variety of investments that are not all subject to the same market risks, including stocks, bonds, cash, and commodities.

You’ll also be choosing investments in numerous economic sectors—not just the hot industry of the moment—as well as in different geographies around the globe. We offer exchange-traded funds (ETFs) which can help make diversification easy.

Special note: All investing involves risk. You can lose money when investing in stocks, bonds, mutual funds, exchange traded funds, and other market securities. Find out more about investment risk here.

Check out Stash

With Stash, you can easily invest in dozens of funds and individual stocks. And while you’re at it, check out Stash Learn. We have hundreds of stories to help educate you about investing.

So get off the sidelines and start Stashing today! You can start with just $5.

The post 5 Tips for Young Investors appeared first on Stash Learn.

Here’s the thing. The two don’t have to rule each other out.

Every dollar you save now, even if it’s small amounts, can really add up over time thanks to the power of compounding.

Credit card debt vs. student loan debt

First of all, paying off your debt–whether that’s credit card, auto loan, or home mortgage–and staying out of debt is always a smart idea. Debt can really weigh you down and harm just about every aspect of your life.

Credit cards, for example, tend to have double-digit interest rates that make it very difficult to get out of debt once you’re in it. In fact, the average interest rate on a new credit card ticked up to 16.75%, according to a recent survey by Creditcards.com, which is 0.6 percentage points higher than it was at the start of 2018.

Credit cards also often have variable rates that move up when interest rates increase, as they have been.

About half of people with student loan debt say they’ve delayed making a contribution to their retirement as a result of their debt.

In contrast, student loans usually have lower, fixed interest rates, and longer repayment terms. The average federally subsidized student loan interest rate ranges between 4.45% and 7%, according to Navient, the student loan processing company.

Student loan debt

The average student loan debt these days is about $37,000, almost double what it was more than a decade ago, according to research.

While federal loans are structured to be paid back in 10 years, the truth is that most people take 20 years or more to pay them back, or twice as long.

In fact, about half of people with student loan debt say they’ve delayed making a contribution to their retirement as a result of their debt, according to a survey conducted in 2016 by the American Institute of CPAs. (AICPA hasn’t updated that segment of its data since.)

But various experts say putting off saving for retirement when you have student loan debt is a mistake.

Start saving in your 20s

The longer you can put money away in a retirement fund, the longer you can benefit potentially from something called compounding. That’s when the interest on the principle—or cash—you’ve put into a fund also earns interest. It can really add up over time.

Here’s an example that illustrates the difference between saving starting at age 25 and 35. The example assumes a 5% return, and annual contributions of $6,000, which is the maximum contribution an individual is allowed to make to either a traditional Individual Retirement Account (IRA) or a Roth IRA when they are under age 50. (Forecasts for long-term large cap stock appreciation are 6%, according to some analysis.)

The investor who starts a decade earlier could possibly save twice as much for retirement as the person who waits.

Other things to think about

The interest you pay on your student loans is tax-deductible, up to $2,500. That means you can potentially get a tax break as you pay off student debt.

By refinancing your existing student loans you could see a dramatic reduction in your interest rate – lowering your monthly payments. And that can mean more money to put aside for your future.

The post Can I Pay Off Student Loans While Saving for Retirement? appeared first on Stash Learn.

In the United States, there are now a record-breaking 157,000 people who have saved $1 million or more in their 401(k) accounts. A 401(k) is a type of employer-sponsored retirement account that many Americans have through their jobs.

The problem is that the majority of U.S. workers don’t have access to such a plan, according to a recent survey from Pew Charitable Trusts.

Here’s something else that might surprise you. Individual Retirement Account (IRA) millionaires are more common than 401(k) millionaires.

About 500,000 people have IRAs with a value between $1 million and $2 million, according to the General Accounting Office, which studied the impact of the tax break given to IRA holders on the federal budget in 2014. GAO used 2011 tax data.

Here’s what’s cool about that number of millionaires. An IRA is a retirement account just about anyone earning an income can set up.

Individual Retirement Account (IRA) millionaires are more common than 401(k) millionaires.

401K vs IRA millionaires

Granted, it’s probably easier to save $1 million or more in a 401(k) than an IRA. A 401(k) lets you put away more money–up to $18,500 if you’re under 50, and an additional $6,000 if you’re over 50. And many employers provide a match on funds their employees put away. All that can really add up over time.

IRAs are available to most people who earn an income, letting you put money away in an investment account on a tax-favorable basis. Since there’s no one matching your contributions (and you aren’t allowed to contribute as much as a 401(k), you may have to save more aggressively over time to get to your magic number.

Quick lesson: What’s an IRA?

There are two types of IRA. Let’s start with the traditional IRA.

It’s funded with your pre-tax dollars, so the money you contribute to your traditional IRA can lower your annual tax bill.

As we said earlier, there are annual limits to what you can contribute. You can put up to $6,000 away each year. Once you’re age 50 or older, you can contribute up to $7,000 annually.

After age 59 ½, you can take money from the account with no penalties. By age 70 1/2 you’re actually required by the IRS to start taking money out of your account. This is called a required minimum distribution (RMD).

An RMD is the amount you must withdraw from your traditional IRA starting at age 70 ½. The amount is determined by an IRS formula that comprises life expectancy and account value.

Roth IRAs

The other type of IRA is a Roth IRA. You fund a Roth with the money you’ve already paid taxes on (your net income). Once you’ve funded the account, your earnings can grow tax-free.

Roth IRAs also have yearly contribution limits, meaning you can only put in $6,000. However, like a traditional IRA, if you’re 50 or older, you can contribute up to $7,000.

When you’re age 59 ½, you can access this money without paying a penalty. Unlike a traditional IRA where you are required to begin taking money out of your account by age 70 ½, you can keep adding to your Roth IRA for as long as you like.

The power of compounding and your IRA

Even saving small amounts of money can add up over time, thanks in part to something called compounding. Compounding is earning money on your money, it’s any return earned on your principal, plus your past returns.

For example, if you have money in a bank account, it’s the interest on that sum plus the past interest it has earned over time. If you have money in an investment account, it’s the percentage you may earn on top of your original investment, plus its previous earnings.

Here’s an example of what compounding looks like, if you put aside $50 a week, or $200 a month for the next 30 years, earning 5% annually. You’d have $159,669. With interest and compounding, that’s more than double the $72,050 of principal you put away.

Make a plan to become an IRA millionaire

If you have a 401(k) through your employer and haven’t set one up, now’s the time to do it. You could be losing out on matching contributions that can really add up over the years.

You can also set up an IRA in addition to your 401(k). The power of compound interest working in two retirement accounts can increase your chances of getting to your magic number

No 401(k)? Anyone can set up and contribute to an IRA. Check out this retirement calculator and learn more about how much you can put aside to get to your million dollar goal.

And that’s how you can really increase your seven-figure retirement chances.  

Not everyone will get to the $1 million mark. That’s okay. The important thing is that you try to work saving into your budget and make it a regular part of your financial life.

The post It’s Possible to Become an IRA Millionaire appeared first on Stash Learn.