No matter how you cut it, the financial future of American workers looks bleak. A recent report from the Economic Policy Institute paints an ugly picture of where we are – and where we’re headed.
Scary fact #1 is that nearly half of American families have no retirement savings at all.
Strike number two is the fact that mean retirement savings of all families was just $95,776 earlier this year.
Worse, the median savings figure – which represents those at the 50th percentile – was just $5,000 for all families across the U.S. and $60,000 for families who have money stashed away.
Since none of these numbers are close to where they should be, retirement might be nothing more than a pipe dream for those who don’t step up their game. But, what can we do?
5 Ways an IRA Can Save Your Retirement
While the obvious solution is boosting contributions to work-sponsored retirement plans, another type of account can also help out. Individual retirement accounts, also known as IRAs, offer a smart solution for those looking to grow wealth for retirement – and score helpful tax benefits along the way.
Depending on the situation, having an IRA could mean the difference between enjoying retirement and struggling to get by. Here are a few ways this type of account could save the “future you” from a serious retirement shortfall:
Have more money to cover emergencies.
Playing perpetual hooky from work might sound like a dream come true, but it won’t save you from all of life’s struggles. You may never have to clock in again, but you’ll still have home repairs to deal with, cars that break down, and medical bills to pay.
Investing in an IRA on top of your work-sponsored retirement plan means you’ll have more money at your disposal – funds you can use to cover unexpected repairs, car failures, and medical emergencies.
“Fixed income sources may be becoming a smaller portion of any retiree’s income, so beefing up other retirement savings is important,” says Minnesota financial advisor Jamie Pomeroy.
“Start investing in an IRA early, be consistent with it, don’t waiver, and you might just find your IRA showing up at just the right time helping to save your finances in retirement, should other fixed income sources be less than expected.”
Enjoy tax-free money in the future.
With a traditional IRA, most people make tax-deductible contributions now then pay taxes on their distributions later. With a Roth IRA, the exact opposite is true. When you invest in a Roth IRA, your contributions are made with after-tax dollars and your distributions are tax-free down the line.
As Pomeroy notes, having different accounts with different tax treatments is also a great way to diversify your retirement. If you’re contributing to a 401(k) plan at work, for example, investing in a Roth can be beneficial if your income allows.
You’re essentially hedging your bets this way, says Pomeroy. “You’ll have a bucket of money that is pre-tax, and a bucket that is post-tax,” he says. “That way, once you’re retired, you’ll have the option of withdrawing from one or the other depending upon your individual tax situation.”
Invest your dollars where it makes the most sense.
While investing in your employer-sponsored 401(k) plan is generally a good idea, some financial advisors say you should look closely at your plan before you max it out. Larger-than-life expense ratios and management fees can eat away at your returns and cost you big money over the years. And if your employer only offers a few plans, there’s not much you can do.
With an IRA, on the other hand, you decide which firm and investments get your money. You can shop around for the best places to open an IRA based on ongoing costs, your choice of investments, or any other criteria you choose.
“Prudently invested, IRA accounts often avoid layers of administration fees levied to company plans,” says Indiana financial advisor Tom Diem of Diem Wealth Management.
The money you’re not paying in administration fees will help grow your account that much faster. And you know what that means – more money in your pocket when you retire.
Use your IRA as a dream fund.
A lifetime of work should be rewarded, yet few people save enough to follow their dreams once they retire. By opening a traditional or Roth IRA now – and contributing the max each year – you can set money aside to travel and enjoy life.
“An IRA can help cover any type of expense in retirement,” says Pomeroy. “If you’ve done some financial planning, and this makes sense for you, why not think of your IRA as the account that you’ll withdraw from to take your annual vacation?”
Since you can begin taking distributions from your traditional IRA without paying a penalty at age 59 ½ – and you can withdraw your contributions from a Roth IRA at any time – these funds can be as flexible as you want them to be.
Not only could having a dream fund “save” your retirement, but it could make it a lot more fun, too.
Borrow against your IRA in a pinch.
Whether your IRA is traditional or of the Roth kind, you have the ability to access your money in a pinch. With a traditional IRA, you can borrow money for 60 days and return it without penalty or interest.
Your Roth IRA makes things easier. With the Roth, you can withdraw contributions at any time – and without penalty.
With either of these options on the table, you can access cash quickly – at retirement or before. Having access to money can make your retirement a lot less bumpy and more enjoyable.
If you’re worried you’re behind when it comes to retirement, take the initiative today to open an IRA. Provided you meet income requirements, these accounts can help fill the gap between what you’re saving now and how much you need.
“An investment in an IRA or Roth IRA can grow to be a substantial sum over the years and is an important asset to provide income in retirement,” says financial advisor David G. Niggel of Key Wealth Partners in Lancaster, PA. “Along with your company sponsored retirement plan, your IRA, Social Security, and proper planning, you should be able to sustain a comfortable lifestyle in retirement.”
This originally appeared on U.S. News and World Report.