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Why An IRA Should Be Part of Your Retirement Plan

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Move Your 401(k) to a better account

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Retirement can seem like such a far off goal. For many there's simply too much going on to worry about it, like:

You could also be trying to build an emergency fund or possibly saving up for a house down payment. However if you get too distracted and wait, you're making yourself financially vulnerable for retirement.

If you haven't already, opening a Roth IRA can help you reach your retirement goal.

Roth IRA vs Traditional IRA- Which is Better?

When people look at IRAs, there may see two options- traditional and Roth. The main difference between the two IRAs has to do with when you’ll be taxed:

Sources: IRS Publication 590 and Wikipedia

For both types of IRA, you can contribute $5,000/year. Please keep in mind that these annual limits are per person. For example, a couple can contribute $10,000 total annually to their Roth IRAs.

I use a Roth IRA and send in my contributions through out the year.

Importance of Asset Allocation

The gist of proper asset allocation is maximizing your return while minimizing your risk.

While maximizing returns seems clear, risk is subjective. Everyone has their own risk tolerance, so you'll see different investors choose different investment vehicles.

A benefit of having the proper asset allocation is to fit your goals. Usually investors seek aggressive growth in the long term and shift to more stability of their money in the short term (i.e. for people retiring soon).

If you want a system that is easy to manage and has a track record of long term growth, you want to look for low cost index funds to put your money in.

These are mutual funds that track a market index such as the S&P 500. They have low expense fees because they not usually actively managed.

Where to Open an IRA

Here are some places to consider for opening an IRA if you haven't already started. The earlier you start, the more you can take advantage of compound interest.

You can also check with your local bank or credit unions for more options.

You can make contributions throughout the year. If you haven't filed your taxes yet for 2011, you can also contribute towards your Roth IRA up until you submit your return.

Finding Money for Your Roth IRA

If you don't know where you can cut your expenses to have money for your Roth IRA, I'm going suggest just one change to your budget that could potentially help you to make out your yearly contributions consistently – don't have a car loan.

Did you know that the average car loan being around $26,300 ?

With car payments $200 or more each month (depending if you have one or two car loans), if you redirect that money towards your Roth IRA, you'll be able to reach your goals without having to make other changes to you budget.

I've written how we've stopped financing cars and instead bought our cars with cash.

If you’re looking at getting started, check out my Betterment review and my guide to investing with a $1,000 or less.

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