With tax time around the corner, it’s all about time: time to organize and crunch the receipts, squeeze in a meeting with an accountant, or perhaps even wait by the mailbox for a refund. (May you be so fortunate.)
And when tax time is done, most of us will go back to our standard routines where time is our own. So what sounds like fun? Choosing a restaurant? Or a brand new tablet to buy with that (hoped-for) refund?
How about choosing investments for your individual retirement account (IRA)?
“Yawn.” At least that’s what most Americans say.
IRAs fall so low on people’s list of financial priorities, according to a survey released this month by TIAA-CREF, that it would hardly seem surprising if Americans spent more time organizing their sock drawers than organizing one of the biggest tools available to build financial freedom.
Here’s some of what the survey revealed; it was conducted with more than 1,000 adults 18 and older:
Americans are more likely to spend two hours selecting a restaurant for a special occasion (25 percent), buying a flat screen TV (21 percent) or tablet computer (16 percent) than on planning an IRA investment (15 percent). (I can guess what you might be thinking: “But have you seen my flat screen TV? It’s a serious gadget, dude.”)
Fewer than one in five (17 percent) Americans are contributing to an IRA – a decline from 22 percent in 2012 – potentially missing tax and savings benefits.
What’s more, fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013.
Even among those who already have an IRA, more than half (55 percent) said they spent an hour or less planning for the investment.
Taken one way, these results are understandable. Many people treat an IRA as a “set it-forget it” proposition, one where you open the account, figure out a monthly/yearly contribution and call it a day.
Yet it’s shocking that among all participants in the survey, more than a third (35 percent) do not understand what an IRA is, or the different benefits offered by an IRA compared to any employer-sponsored plan.
And when you get to the Money Under 30 age bracket (18-34), the knowledge gap is even wider (45 percent). If you don’t know, here it is in quick sentence: an Individual Retirement Account is a place where you can invest money that grows tax free or tax deferred until you hit age 59 1/2.
“For Gen Y, there is no shortage of challenges that impact how they look at money,” said Amy Podzius, Senior Financial Consultant at TIAA-CREF. “Their ability to start a savings plan is hindered by low, entry-level wages, a lack of available jobs, and the fact that many struggle with high student loan and credit card debt. They have also been affected by the great recession or have seen family and friends impacted.”
You might think those would be good excuses for not starting an IRA, but Podzius sees it otherwise. “Given these challenges, we found it interesting that almost half—45 percent of respondents age 18 to 34—are not aware of the potential tax and savings benefits of an IRA.”
Even if you do understand how IRAs work, you may look at the investment as a static thing. The problem is that with time, our lives change and our financial circumstances along with them. Just as you wouldn’t want to file the same tax return year after year, the folks at TIAA-CREF advise using tax time as a reality check for whether you’re meeting your retirement investment goals.
For starters, you may be putting money aside in a 401(k) or a 413(b), which are employer-sponsored plans. That may be enough for you (especially if your company matches your retirement allocation), but the matches and contributions will have limits, meaning that a separate IRA could still be a great idea. Read more here about whether to use a 401(k), an IRA, or both.
As for what you can do about 2013 taxes and your IRA, you still have time to figure something out. If you are under 50 years of age at the end of the calendar year, you may be able to contribute up to $5,500 or 100 percent of your earned income, whichever is less, to a Traditional or a Roth IRA in 2014. Your contributions can be split between a Traditional IRA and a Roth IRA, but the combined limit is $5,500. (For singles, the income threshold is less than $114,000 to contribute the maximum; for married filing jointly, it’s less than $181,000.)
And if you haven’t set up an IRA yet, don’t worry. Here’s a quick primer: With a traditional IRA, contributions aren’t subject to federal and state income taxes for the year during which you make them; you pay when you withdraw your accumulated contributions plus investment earnings in retirement. In a Roth, it’s the other way around; you pay federal and state income taxes the year you make the contributions, but not in retirement.
If you expect your income tax rates to rise over time—often the case with younger workers—a Roth can potentially set you up for major riches in retirement. TIAA-CREF also has an IRA calculator that can help you figure out how much your IRA will grow with time and which IRA is right for you.
To that end, the experts pass on this advice:
Watch out for fees: IRAs charge investment-related fees and expenses, so it’s worth it to shop around for a good deal. Also, you may pay higher expenses for mutual funds in an IRA than through your 401(k) or 403(b), as workplace retirement plans may benefit from group buying power, and thus charge lower investment fees than you would pay investing on your own in an IRA.
Look over your investment options: Some IRAs provide access to a brokerage account, in which you can invest in individual stocks and bonds. You’ll need to ensure that you have the right investments for your age and risk tolerance across all of your retirement savings, including your employer plan. You might want to consider a lifecycle fund (also known as a target-date fund), which automatically rebalances over time, making for easier planning for you.
If you want a truly hands-off option, check out Betterment, which makes choosing your investments as simple as sliding a widget between one and 100 to match your desired level of risk.
Alternately, a financial advisor can help you choose and open an IRA as well as select your investments within the account.
If you’ve got all your IRA ducks in a row, then good for you: The years before age 30 represent the best time to get this financial puzzle piece in place. And if you can get your IRA up to speed and still make time for buying a big-screen TV, so much the better.