When looking at all the various options you have to save money for retirement; you'll come across a vast number of retirement plans, investment opportunities, or even fallbacks like Social Security retirement benefits. All of these have their advantages and disadvantages.
For example, Social Security is a very reliable fallback option for many U.S. citizens. Unfortunately, you need to have accrued at least 40 Social Security credits over your working life to qualify – and even if you do, the money you receive might not be enough to maintain your current standard of living. Putting money aside in a savings account while you're still working might sound like a good alternative since you'll know exactly how much money you will get out of your account once you're retired. However, due to low interest rates and high inflation, the money on your account might actually lose value if it just sits there.
In short, if you're looking for a way to create and grow retirement savings, you'll need to take advantage of retirement plans which allow you to actively invest your money, increasing your funds in such a way that your earnings outpace inflation.
This is where IRAs come into the picture. Individual retirement accounts are investment accounts that are explicitly used for retirement planning. They benefit from a number of unique tax advantages while being subject to rules such as income limits, contribution limits, and required minimum distributions (mandatory withdrawals). All of this is meant to facilitate using your IRA as a retirement account while preventing investors from taking advantage of tax benefits explicitly meant for retirees.
IRAs have long been the go-to retirement plan for high net-worth individuals. Self-directed IRAs, in particular, provide total freedom and the greatest potential for increasing your wealth. And with CARL, all of these advantages are now open to you as well.
The big advantage of traditional IRAs and Roth IRAs is that you can use the money deposited in them for investing, either directly or via a broker who makes investment decisions on your behalf. So instead of hoping the SSA will grant you income-based benefits, which are enough to support you or sitting on your money hoping inflation won't outpace interest rates, you can take your financial future into your own hands. Depending on how much you deposit in IRA contributions and how well you invest that money afterward, you might enter retirement age with significantly greater funds than you originally invested. You might even be able to retire early and enjoy your new freedom to the fullest, thanks to total financial security.
Use Whichever Investment Vehicles You Prefer
Since IRAs are meant to keep your retirement savings secure, the U.S. government prohibits traditional IRA owners and Roth IRA holders from investing in some asset classes, such as collectibles, life insurance (as these benefit your heirs, not yourself), and real estate (only real estate which you use yourself, though).
Most IRAs invest in stocks and bonds, mutual funds, and ETFs. However, so-called "self-directed IRAs" can also take full advantage of alternative investment opportunities, from private equity to the quantitative hedge funds available via the CARL app. If you're looking to fund your retirement, individual retirement accounts and self-directed IRAs give you the best options for high-yield investing. And since self-directed IRAs can take advantage of alternative investment vehicles, they aren't even bound to the "60/40 rule" (60% stock investment, 40% bonds), which is becoming an increasingly inadequate strategy to prepare you financially for retirement.
Take Advantage of a Regular Income That Can Be as Flexible as You Want It to Be
Most retirement plans are set up as annuities – you invest either a lump sum or a monthly premium, and once you hit a certain age, you start receiving monthly payouts. This is because they're meant to provide you with a steady income similar to your monthly paycheck back when you were still working.
You can make withdrawals from an IRA at any point in time, but if you're under 59.5 years old, you incur a penalty. Once you're 72+, a traditional IRA will require you to withdraw a minimum amount of money each year, though a Roth IRA doesn't.
The situation is a bit different with individual retirement accounts: Traditional IRAs don't simply start paying out money if you don't want them to. However, they require you to make "required minimum distributions" (RMDs) starting at age 72. This means that once you're old enough, you have to withdraw a specific amount of money each year to make sure your IRA is actually being used as a retirement account. You are free to withdraw more money, but you have to withdraw at least the minimum, or you could be faced with repercussions on your taxes. On the flip-side, with a Roth IRA, you don't have to make required withdrawals, though your heirs will eventually have to.
Traditional and Roth IRAs
There are numerous differences between these two types of individual retirement accounts, but the most important ones are these:
- Anybody can open a traditional IRA, but Roth IRAs are available only to workers that qualify under a specific income limit. This takes modified adjusted gross income and filing status (married filing or single filing) into account and is defined by the IRS each year.
- Traditional IRA contributions are tax-deferred, but withdrawals are taxed.
- Roth IRA contributions aren't tax-deductible, but withdrawals are tax-free.
- Traditional IRAs feature required minimum distributions (RMD) starting at age 72.
- Roth IRAs don't have RMDs.
Both traditional IRAs and Roth IRAs have annual contribution limits. As of 2022, you cannot contribute more than $6,000 ($7,000 if you're already age 50 or older). If your taxable income ("taxable compensation" as per the IRS) is less than that, this amount is now your new Roth IRA contribution limit.
When making IRA contributions, keep in mind that the IRA contribution limit counts all contributions made to all of your individual investment accounts (whether they're traditional IRAs or Roth IRAs). So $6,000 (or $7,000 if you're age 50 or older) is your total maximum.
You should also be aware that Roth IRAs take your modified adjusted gross income and your filing status into account to determine your IRA contribution limit. If you're married, filing separately or jointly can make a huge difference in terms of your maximum Roth IRA contributions. You can find the current rules on the IRS website.
Why do IRAs have contribution limits?
Individual retirement accounts are meant to be a way of funding your retirement. Since they provide notable tax advantages, the IRS wants to ensure two things:
- High-paid workers should not be advantaged over moderate-income workers due to being able to put more money into a tax-advantaged investment account.
- Institutional investors and other large-scale investors should not be able to take advantage of IRA tax breaks by putting large amounts of money into traditional IRAs or Roth IRAs since those tax breaks are meant for workers to fund their retirement.
Be aware that contributing more than the allowed limit in a year will incur a penalty from the IRS: You will have to pay a 6% tax on the excess amount of money each year it remains in your retirement account.
CARL's quantitative hedge funds offer 15%+ targeted returns at only a $20,000 minimum investment. If you qualify as an accredited investor, this is one of the most efficient ways to grow your wealth. However, agencies that offer individual retirement funds, such as banks and brokers, often don't allow the money in your account to be used towards hedge fund investing. However, CARL's self-directed IRAs are open to hedge fund investing, giving you total freedom to invest wherever you want, within the rules of the IRS.
Maybe you want to use CARL's quants as a way to grow your wealth or simply as a diversification tool. One way or another, you'll get to enjoy high-yield investment opportunities with built-in risk controls. With CARL's quants, you can even go beyond the outdated 60/40 retirement investing strategy to gain greater returns at a well-managed risk level. Contact CARL today to access our IRAs and the CARL app, which gives you unprecedented access to our hedge funds.