You’ve heard how important it is to fund your own retirement.
You’ve heard that Social Security may not won’t be there for you.
You’ve heard that you need to be investing in some type of IRA, 401k or some other retirement account that must be an acronym and may include numbers. However, you may not realize some things about those retirement accounts.
No worries! I’m here to let you know about six common retirement account misconceptions. So here they are…
Misconception #1:
“Contribution limits are for a household”
Truth: Contribution limits for your 401k, IRA, TSP, or whatever type of personal or employer retirement account you contribute to are for an individual, not a household. For example, in 2015 you can contribute up to $5,500 to your IRA. Your spouse can also contribute $5,500 into an IRA, for a grand total of $11,000 in contributions. Double the contributions, double the fun!
By the way, you can always find the current contribution limits here.
Misconception #2:
“You can only have one IRA, 401k, etc.”
Truth: You can actually have multiple retirement accounts. You could have a few 401ks and 15 IRAs if you want, though I wouldn’t recommend doing that for the sake of keeping track. The only thing the IRS cares about is that you don’t exceed the contribution limit with the total of your contributions to all accounts.
Misconception #3:
“IRAs are only for retirement”
Truth: Retirement is only one thing your IRA is good for. You can also use it for education, medical expenses and even as a down-payment for your first home. That’s not all though! Here are even more uses for your IRA, other than retirement.
Misconception #4:
“A Roth (or Traditional) IRA is always better”
Truth: It completely depends on your situation. I remember opening my first Roth IRA and wondering why anyone would choose a Traditional IRA (other than the income restrictions), but one is not always better than the other. It comes down to your tax bracket. Is it going to be more beneficial for you to be taxed now or later? That’s your call.
Misconception #5:
“You can put any money into a retirement plan”
Truth: Contributions to a standard retirement plan must be contributed from income; however, there is an exception to this. Non-working spouses can contribute to a spousal IRA, which allows single-income families to still contribute up to $11,000. Either way, somehow the money must be income – you can’t put just any old money into a retirement account.
So what happens if you strike it big in Vegas and want to throw it into your retirement? Well first off, you would be one out of a million who would do that with your winnings, but if that actually does happen, just contribute all of your income and live off the lump sum you just won.
Misconception #6:
“You are always charged a penalty when you withdrawal early”
Truth: As I mentioned above, you can use your IRA for several things other than retirement, but there is another way to withdrawal early (specifically out of a Roth) without a penalty – you can simply withdrawal only what you’ve contributed. With a Roth IRA, you can withdrawal your contributions at any time (tax and penalty free), but there’s a catch…you’ve got to prove how much you’ve contributed to the plan over the years. It’s best to wait until retirement to touch the money, but if you do plan on an early withdrawal, make sure to keep track of your actual contributions.
Why Not Open an IRA?
Your employer may or may not have a company retirement plan. Either way, it’s nice to have an IRA, whether it’s your only retirement plan or an additional one. I have both.