Investing in an IRA is a smart move for anyone looking to build retirement wealth, and when you’re a black business owner in the US, you have to be even smarter.
Individual retirement accounts (IRAs) are a great way to save for retirement, especially if you don’t have access to a 401(k) through an employer.
There are two types of IRAs: traditional and Roth. The traditional type allows you to deduct contributions from your taxes, with withdrawals taxed in retirement. The Roth type works in reverse, requiring you to pay taxes on contributions, but offering withdrawals tax-free.
If this is your first time investing in an IRA, here are some dos and don’ts you should take note of as a black entrepreneur in the US:
1. Save enough money to meet your current goals and objectives: You have different goals you’d love to accomplish. They could be for retirement, college, a home, or anything else. Make sure you’re saving enough money to reach those goals by the time you need them. Whilst investing in an IRA is great for the long term—especially when you have years until you plan to retire — make sure you have a healthy savings account with enough money to cover your immediate needs.
2. Invest early and often: The longer your money is invested, the more likely it is to grow over time. Even if you are not earning much money now, put something away for the future so you can benefit from compound interest (interest earned on both your initial investment and any interest accrued).
3. Make sure you’re eligible to open an IRA: Every state has certain requirements you must meet before you can open an IRA. Ensure you are aware of those requirements before trying to open an IRA so you don’t stress yourself so much.
If you are a black business owner that needs more information about the requirements for opening an IRA, you could join a black business network or a black business association.
4. Consult with a financial adviser or tax professional: Before making any decisions about how best to save for retirement, try consulting a financial adviser or tax professional. They are experts in this area, so they can provide you with all the information you need to make the right decision and even share some black business secrets with you.
5. Understand the tax implications: Unlike your 401(k), which is funded with pre-tax contributions and taxed when you take withdrawals in retirement, a traditional IRA lets you make tax-deductible contributions that grow tax-free until you withdraw them in retirement. An IRA is only taxed when you withdraw funds from it. That’s called a “tax advantage.”
Many people opt for a Roth IRA instead of a traditional IRA because they want to pay taxes on the front end rather than on the back end. With a Roth IRA, you pay taxes on the money before it goes into the account, and then there are no further taxes once distributions begin at age 59½ or later.
IRA accounts should be used to save for retirement, not as emergency funds (because there are penalties if you withdraw before age 59½).
1. Don’t spend more than you can afford on an IRA: Just like there are minimums for how much money must be in an IRA, there are also maximum amounts that can be in one at any given time.
If you listen to business news in the US, you will know that most of the time you can’t go above the stipulated amount you are required to save each year.
2. Don’t assume your IRA will earn much money: Investment types vary widely in how much money you can make over time. Some investments, like stocks and real estate, offer more growth potential than bonds and certificates of deposit (CDs). But riskier investments also have a greater chance of failure. Just because black-owned business stocks are growing quickly doesn’t mean they will continue growing, or that another stock won’t outpace them in the next month or year.
IRAs are a great retirement tool for entrepreneurs, but you have to make sure to use them correctly. If you don’t, you could end up paying a lot more in taxes and penalties than you need to. So consider these tips when setting up your IRA and getting ready to retire.
If you want more investing advice, you can always ask your financial adviser, or you could become a member of a black business association or a black business network–they usually have black business secrets that will be helpful to you as a black business owner.
Don’t forget that the best time to get serious about saving for retirement is now – and the sooner the better. The power of compounding returns over time is truly incredible!.
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