Hate Thinking About Retirement? You’ll Like This Story

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IRA stands for Individual Retirement Account, and like a 401(k), it’s a long-term investment plan that predominantly focuses on stocks, bonds, and mutual funds to be cashed in when you’re ready to retire. But unlike your 401(k), an IRA is not supported by funds from an employer. Additionally, you can only invest a total of $5,000 across all of your IRAs each year.

A Traditional IRA is funded by pre-tax assets, but taxed as income when withdrawn at retirement. According to Palmer, “it’s a good option for people currently earning a relatively high income who expect their retirement income to be lower. This way, they pay the taxes when they’re in a lower tax bracket.”

The funds in a Roth IRA are from post-tax contributions and not subject to further taxation down the road. “Since you deposit money after paying taxes and withdraw money tax-free, it’s great for people currently earning low to mid-level incomes (students and entry-level workers, for example) who expect to earn more later. This way, they’re paying the taxes when they’re in a lower income tax bracket.” These are both low-risk, but low-yield, options.