What is an IRA?

Whether you just landed your first job or you are getting back into the job market, it’s a smart move to start thinking about your retirement.

You’ve probably heard of 401ks, since they are one of the most common retirement accounts. 401ks and other of employer-sponsored plans are the primary way most Americans build retirement savings. The bad news is over 30 million workers don’t have access to retirement plans like a 401k in the workplace. This means it is up to you to find ways to save for you own retirement. The good news is even if you are not able to join your employer’s retirement plan, you have options.

There is a simple alternative that can help you save for retirement without having to rely your job for help.

It’s called an IRA

IRA stands for Individual Retirement Account. Its purpose is to help individuals save money for retirement and give you a tax benefit for doing so. Think of an IRA like a backpack. The account is yours and you carry it with you wherever you work. On the other hand, 401ks are like great big suitcases; you can put a lot inside of them, but they aren’t easy to take with you when you move on into a new job. Don’t get me wrong, 401ks are great, especially if you get a match, but they just aren’t practical for everyone.

401ks and IRAs are both good because they give you tax advantages to encourage you to save for retirement. However, as an hourly worker you may not get help with retirement from your job. So here is some more information on common types of IRAs that might be a better fit for you.

There are two main types of IRAs

Roth and Traditional. They have the same contribution limits of $6,000 per year and both are meant to grow your money over time. But there are some differences in the way your money grows and access to your money if you need it.

When you put money in a Roth IRA, you won’t have to pay tax later on down the road. As an hourly worker, this tends to be the best option since you’ll likely make more money in the future (and want to pay less taxes). With a Roth, you may withdraw the money you put in without having to pay any penalties.

A traditional IRA helps you save on taxes today but you’ll have to pay tax when you withdrawal the money in retirement. If you make a lot of money now, a traditional IRA is typically a good idea but Traditional IRAs are more restrictive. If you withdraw the money you put in before retirement, you pay a penalty unless you have a good reason like buying a house or a medical expense.

According to a study by the Bureau of Labor Statistics, most individuals will have on average more than eleven jobs between the ages of 18 - 48 years old. So IRAs are a great fit for today’s worker. At the end of the day, it is less important about which backpack you have, and more important to pick one and head to your next shift.


This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Finhabits to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Finhabits, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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