Individual retirement accounts (IRAs) are among the most popular vehicles for building a robust retirement nest egg. Yet, despite their benefits, there are several myths surrounding IRAs that can confuse investors and limit potential savings.
Falling victim to some of these common misconceptions can prevent you from making smart choices when planning for retirement.
Here are 10 myths about IRA investing that can keep you from maximizing retirement savings and enjoying a stress-free retirement .
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1. Older people can't contribute to an IRA
Many believe that once you hit a certain age, you can no longer contribute to an IRA. This used to be the case, but it’s no longer true.
Thanks to the SECURE Act of 2019, people over 70½ can continue making contributions to a traditional IRA as long as they have earned income. If you are working later in life, you now can continue to grow your retirement savings.
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2. Children can't contribute to an IRA
It’s a common misconception that IRAs are only for adults. In fact, children with earned income can also contribute to an IRA. This can be a great way to kickstart their retirement savings early.
The key requirement is that the child must have earned income from work such as baby-sitting or mowing lawns. By starting young, your children can benefit from decades of tax-deferred or tax-free growth.
3. You can borrow from an IRA
Unlike a 401(k), you cannot borrow from your IRA. Many people mistakenly believe they can take out loans from their IRA in the same way they can with other retirement accounts such as a 401(k), but IRAs do not offer a loan option.
However, you are allowed to withdraw funds, although doing so may incur taxes and penalties if you are not careful.
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4. You can never make withdrawals until you retire
This myth discourages people from investing in IRAs because they fear they won’t have access to their money in case of an emergency.
In reality, you can withdraw from your IRA before age 59 ½. However, if you do so, you will often be subject to paying both taxes and a 10% penalty.
Still, the money is there and available if you absolutely need it.
5. All early withdrawals are subject to penalties
Speaking of early withdrawals, not all such withdrawals are subject to penalties. While withdrawing from your IRA before age 59½ often triggers a 10% penalty, several exceptions exist.
These include using the money for qualified first-time home purchases, higher education expenses, and some unreimbursed medical expenses.
Understanding these rules can help you use your IRA more strategically and avoid unnecessary penalties.
6. It is impossible to make IRA contributions if you make too much money
It is true that high earners are often ineligible to contribute to an IRA the way most other people do. However, there is a way around this rule.
For example, high-income earners can still make nondeductible IRA contributions. That means you won’t get a tax deduction up front, but the money can still grow tax-deferred.
Or, if you prefer, you can convert a nondeductible IRA to a Roth IRA — a maneuver often referred to as a “backdoor Roth IRA.”
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7. Roth IRAs are always better than traditional IRAs
Both Roth and traditional IRAs have their pros and cons, and one isn’t universally better than the other.
Roth IRAs allow for tax-free withdrawals in retirement, but the contributions aren’t tax-deductible. Traditional IRAs provide upfront tax savings through deductible contributions, but withdrawals in retirement are taxed as ordinary income.
Choosing between these options requires careful consideration of your specific situation. The decision about which option is better for you often depends on your current tax bracket, expected tax bracket in retirement, and financial goals.
8. You can't contribute to an IRA if you contribute to a 401(k)
People typically believe they must choose between contributing to an IRA or a 401(k), but that’s not true. You can contribute to both, although there are rules to consider.
Your ability to deduct contributions to a traditional IRA may be limited if you have a 401(k) through work, but you can still make contributions to both accounts to maximize your retirement savings.
Before contributing to both types of accounts, it might be wise to speak with a financial advisor or tax professional so you don’t run afoul of the rules.
9. You can never touch the principal of a Roth IRA until retirement
Unlike traditional IRAs, Roth IRA contributions can be withdrawn at any time without taxes or penalties.
This flexibility makes Roth IRAs a great option for individuals who want to build long-term retirement savings while maintaining some liquidity.
However, this rule only applies to Roth contributions, not the earnings you generate in the account.
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10. You must take withdrawals from a Roth IRA at age 73
Traditional IRAs require you to start taking required minimum distributions (RMDs) at age 73, but this rule does not apply to Roth IRAs. As long as the account owner is alive, they are not required to take distributions from their Roth IRA.
This allows your money to continue growing tax-free for as long as you want, which can be a key benefit in your retirement planning.
Bottom line
Understanding the truth behind these common IRA myths can help you optimize retirement savings and make better financial decisions. By debunking these misconceptions, you can confidently adjust your retirement plan and avoid costly mistakes.
Taking a closer look at your investment strategy today could set you up for a smoother future.
Money tips that can work for everyone
No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.
Focus on paying off your debt. Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.
Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.
Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).
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