Individual Retirement Account: Investing in Financial Security

In the financial world, "IRA" stands for individual retirement account. These accounts function as investment instruments that are subsidized indirectly via tax advantages. Your savings in such a retirement account are a valuable investment resource to further improve on the regular income you'll live on once you retire. CARL offers self-directed IRAs and sophisticated quant hedge funds, which you can use to diversify your retirement portfolio and generate investment returns. After all, the more you grow your retirement savings, the more you’ll enjoy life as a retiree.

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Generating Income for Your Retirement With an IRA

An IRA is a tax-advantaged savings account that individuals can open to invest in a long-term goal: a financially stable future retirement.

The U.S. government subsidizes retirement savings indirectly through tax advantages to incentivize people to save money for this part of their lives. The only real requirement for opening your individual retirement account is that you must have earned income. Passive income such as money derived from a silent partnership in a business or rental property doesn't qualify. You need an active source of income to be eligible for an IRA. This condition means anyone with a job can open up an individual retirement plan, whether 50 or 18 years old.

catch-up mechanic is built into most types of IRAs for latecomers to be able to save meaningful equity despite arriving late to the party. The annual contribution limit IRA is raised for IRA owners that are 50 or older. With the account's long-time horizon and relative safety come low risk and liquidity. You're allowed to make withdrawals before the age of 59.5, but you have to pay an early withdrawal penalty of up to 10 %.

There are several options for you to start your retirement planning and open an IRA. Online brokers are one way to have complete control over all investments you choose to make with your savings. On the other end of the spectrum, robo-advisors are perfect for hands-off investors who want an automated service to keep their portfolios balanced.

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The Big Four: The Most Popular IRAs

As is the case with most financial products, there are various types of IRAs available to choose from. Traditional IRA, Roth IRA, SIMPLE, SEP, Rollover, spousal IRA, SDIRA, or SARSEPs – the list goes on and feels overwhelmingly long on a first look. Despite their similarities, the various types have significant differences.

Note that self-directed IRAs are a template that can be applied to most IRA variants. Self-directed accounts allow you to put your money into a wide variety of alternative investment vehicles that aren't available to non-self-directed IRAs.

In the vast field of IRAs, there are four subtypes which are most popular with investors and future retirees. The other types are usually less popular because they serve more niche interests.

The Traditional IRA – The Old Reliable

Regarded as the "biggest tax break in history", the traditional IRA has been popular since its institution in the mid-1970s. The only prerequisite for setting it up is a sufficient, steady income. A traditional IRA's biggest draw is that IRA contributions are tax-deductible.

Since 2021, IRA owners can put a maximum of $6,000 into their accounts. If you're over 50 years old, the contribution limit increases to $7,000.

But there are limiting factors when it comes to setting up a traditional IRA. The Internal Revenue Service (IRS) has drawn up a set of rules concerning deductions based on your modified adjusted gross income (MAGI). They distinguish between married couples who file for taxes separately or jointly as well as singles. Also, these rules can be subject to annual changes, which you can get detailed information on at the IRS itself.

Withdrawals from a traditional IRA are included in your gross income, from which federal income tax gets drawn. This procedure seeks to equalize the tax-deferred IRA contribution. Meanwhile, Roth IRAs have tax-free qualified withdrawals. As the owner of a traditional IRA, you are allowed to switch from a traditional to a Roth IRA. But this change can only occur once, and the decision is irreversible.

The Roth IRA

Initially created as an update for the traditional IRA, the Roth IRA has become a popular alternative to its predecessor. The retirement savings in the account can consist of various investment vehicles such as mutual funds, bonds, or common stocks. The IRS states specific rules for filing and eligibility for a Roth IRA. This account type's main benefit is its unique tax structure:

  1. Qualified withdrawals from a Roth IRA are tax-free.
  2. Growth in the retirement account's savings is tax-free.

These two factors are responsible for the high popularity of the Roth IRA and the shorter list of restrictions on possible investments made with the savings in the account. Also, distributions from this IRA type don't increase your adjusted gross income. Contribution limits are the same as with a traditional IRA, while all contributions are non-deductible.

Only ten years after the Roth IRA was established as an alternative retirement account type, 50 million taxpayers had already invested $3.3 trillion in their accounts.

Another benefit is the lack of Required Minimum Distributions (RMD) with a Roth IRA. While you have to make withdrawals from a traditional IRA once you've reached 72 years of age, there is no such rule for Roth IRAs.

SEP IRA

SEP is an acronym for "simplified employee pension". Thus, SEP IRAs are open primarily to a specific group of future retirees:

  • small-business owners
  • freelancers
  • independent contractors

The same rules that apply to withdrawing from a traditional IRA also apply for withdrawing from a SEP IRA. Business owners are allowed to open accounts of this type for their employees. But these accounts stay employer-provided for their lifetime, which means the beneficiaries can't contribute to their account. Also, withdrawing funds is subject to taxation by the IRS.

SIMPLE IRA

Another option for self-employed individuals and small businesses is the SIMPLE IRA. This type also follows the rules applicable to traditional IRAs. The difference lies in who is allowed to contribute. Employer and employee can both make contributions to the individual retirement account, and the employer is even required to do so.

To be precise: SIMPLE is an acronym for "savings incentive match plan for employees", describing the nature of this IRA subtype.

As of 2022, the contribution limit for employees is $14,000, and the catch-up is limited at $3,000 for workers aged 50 or older with a freshly set up account.

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Using Your IRA for Investing

The funds placed in your retirement plan can be used for investments. Limiting factors for possible investments in your financial plan are IRS limitations on the one hand and limitations set up by your provider on the other hand. To achieve your financial goals by investing the funds in your IRA account, you have to ask yourself three important questions:

  • How do you want to invest?
  • How do you cope with risk?
  • What is your time horizon?

The first question tells you which investment vehicles you might be interested in. You can choose from a wide array of financial products like ETFs, mutual funds, or quant hedge funds with CARL. As is the case with any investment, but particularly with your retirement plan, risk plays a significant role. While higher risk usually means higher-yielding returns, you must be able to live with the volatility investing – the possibility of an investment loss. The last question is about the time frame: How long do you plan to invest in a particular investment instrument before retiring? For some financial products, such as ETFs, longer time frames are beneficial, while others, such as stocks, may be chosen as short-term stock investments.

What Are Viable Investment Options?

Various products can be considered viable investment options for your retirement savings; among these are ETFs, stocks, mutual funds, bonds, or CARL quant hedge fund strategies. Investing in real estate isn't prohibited by law as an option, but many providers don't allow it based on their own set of rules for setting up an IRA account. In general, self-directed IRAs have fewer restrictions on which investment opportunities you can take advantage of.

CARL offers you a perfect package for investing: an easily accessible, powerful app, sophisticated quant hedge fund strategies with a low entry barrier, a minimum investment of only $20,000, and the option of setting up a self-directed IRA. Using CARL to achieve your financial goals means you can benefit from 15 %+ targeted returns, high liquidity, and realtime performance tracking features.

Assets You Are Prohibited From Investing In

The IRS has ruled that two assets are not open for investing via your IRA: collectibles and life insurance. If you do choose to invest in collectibles, you are subject to additional taxes up to 10% on early distributions. We have compiled a partial list of examples that fall into the collectible category:

  • stamps
  • coins
  • antiques
  • artwork
  • gems

Bullion made of gold and other precious metals are also filed as collectibles by IRA statues.

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3 Easy Steps to Start Investing With CARL

Investing in quants is as easy as pie if you've got CARL on your side. Investors can set up an CARL account quickly and easily.

Set Up Your Account

Quickly and securely connect your CARL account to your bank and transfer investment funds.

Analyze Investments

Using the tools within the CARL app, determine which strategies at what allocations are right for your investment goals.

Fund Your Investment

Simply save your portfolio settings and on the next strategy funding cycle your investment will be live!

Retirement Planning: Are CARL and Your IRA a Match?

Using an individual retirement account as a baseline to make provisions for when you retire is a great start. Using those savings to invest and grow your retirement income is better. Investing these funds with CARL is the cherry on top. Get in touch with CARL to find out if you are an accredited investor, set up an account, and start investing today to grow your wealth to enjoy your time as a retiree.

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Introducing CARL Self Directed IRA

The CARL Self Directed IRA is now live on the CARL app. Listen to this podcast episode where John Bowens from Equity Trust, our partner in this offering, and Jamie Uppenberg from CARL talk about self-directed IRAs and the benefits of alternative investments like the hedge funds available with CARL.

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