# Have an extra $50? $100? Even $20? Use it on an IRA for your future retirement (maybe even sooner)

IRAs are retirement-focused investment vehicles, and just like the 401(k), they come with their own sets of rules. 

There are two types of individual retirement accounts: traditional, which is funded with pretax dollars that grow tax-free until distribution, at which point you’re taxed on it, and Roth accounts, which use after-tax contributions but are withdrawn tax-free (when used correctly). 

Getting started with an IRA is relatively simple. In order to contribute to this type of account, the person must be earning compensation for the year, which includes wages, salaries, bonuses, professional fees, commissions and self-employment income, according to the Internal Revenue Service. Rental, interest and dividend income, as well as pension or annuity income, does not count as compensation. 

With individual retirement accounts, savers can watch their money grow exponentially more than if that money were stuck in a typical savings account. Investment accounts, such as IRA and 401(k) plans, offer investors compound interest, so as more money is contributed and earned in the account, more money is generated. 

Take this example: if a 25-year-old invests $1,000 every year for 10 years, then $2,000 every year for 10 years and then stops contributing to the account, at 65 years old, she’d have $160,000 (assuming a 6% rate of return), according to personal finance site Her Money. If a 45-year-old investor were to do the same but begin contributing at 45, he’d have less than $50,000 at age 65. 

Have a question about your retirement, including where to live? Check out MarketWatch’s column “Help Me Retire” and email us at [email protected] 

What to know first

Contributions are limited to $6,000 in 2021 and 2020, with an additional $1,000 limit for individuals who are 50 and older. Savers have until the delayed tax deadline, May 17, to contribute to an IRA on behalf of 2020. Contributing for a prior year can provide tax benefits when filing the last year’s tax return, and also save room for more contributions in the current year’s IRA. 

Contributions to traditional IRAs may be tax deductible if the investor does not participate in a workplace retirement plan, or if they do participate in a workplace retirement plan but meet certain income thresholds: in 2021, single or head of household filers can take a full deduction up to their contributions if they have a modified adjusted gross income of $66,000 or less, and a partial deduction up to $76,000; married filing jointly filers or qualifying widowers can take a full deduction if they earn $105,000 or less, and a partial deduction up to $125,000; and those who are married filing separately must earn less than $10,000 to receive a partial deduction.

See: Is Suze Orman right? Is a traditional IRA really the wrong way to invest for retirement?

A Roth IRA does not allow for tax deductions, but they make sense for people who are currently in low tax brackets and anticipate being in a higher tax bracket around the time of distribution. Investors might also have an easier time tapping into these funds before age 59-1/2 for qualified exceptions (more details on distribution rules and who is eligible, according to the IRS, here).

Roth IRAs are subject to income thresholds for contributions. Single filers or heads of household must have a modified adjusted gross income of less than $125,000 in order to contribute the max amount in an IRA, and can contribute a reduced amount if they earn up to $140,000; individuals who are married filing jointly or qualifying widowers must earn less than $198,000 for the full limit, or up to $208,000 for a reduced amount. People who are married filing separately have a contribution limit of $10,000 for a reduced amount. 

Spouses can also contribute on behalf of their nonworking husbands and wives with a spousal IRA.

Also see: How to buy 10 years of retirement for $3,650 

How to get started 

Many banks and financial institutions house IRAs. Typically, it’s as easy as searching for an IRA on the institution’s website. If you’re already a member of that bank or firm, you’ll likely see your information displayed on the screen to confirm its accuracy and the account can be opened within minutes. 

Then it comes down to funding the account, which can be done through a simple transfer between accounts at the institution, or using money from outside of the firm. Connecting an outside bank account to the IRA can take a few days, or even a week, but individuals can also deposit money using a check if they don’t want to wait to fund the account. 

Once funds have been added to the account, retirement savers must decide on how they’d like to invest the money. For the novice, this can seem overwhelming. One option is a target-date fund, which is an investment tied to an estimated year for retirement that automatically adjusts to be more conservative as that year approaches. Kiplinger curated a list of 10 target-date funds to consider. 

Others who want a more personal approach might want to consider reaching out to a financial adviser at the institution who can help craft the proper asset allocation. Picking specific investments takes more time and research — consider these tips for investment decisions if you’re a new investor. 

Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column