Don't Have an IRA for Your Retirement? You're Going to Regret That

It isn't easy to plan for retirement. A lot of Americans find it hard to keep on top of today's bills, never mind put aside money for the future. If you don't have an individual retirement account (IRA) or another type of retirement account, it's understandable. Unfortunately, it could also be problematic.

Once you stop working, Social Security will only go so far. If you can't rely on your savings, you may need to continue working or drastically cut costs to keep your head above water financially. It's a scary prospect -- and one that's leading to increasing levels of homelessness and significant hardships amongst today's older generations.

The sooner you can start contributing to an IRA or other retirement account, the better.

What is an IRA?

IRAs are tax-advantaged accounts. Those tax breaks are one way the government helps you save money for your age. They're like other brokerage accounts in that you can use them to invest in stocks, bonds, and funds.

However, unlike other brokerage accounts, you'll need to wait until later in life to take out your money. You may have to pay extra tax if you want to withdraw funds before you reach 59 1/2.

There are also annual limits on how much you can put into your IRAs. For example, the maximum you can contribute to IRAs in 2024 is $7,000. People over age 50 can make extra catch-up contributions of $1,000.

Only 4 in 10 Americans have an IRA

According to the Investment Company Institute, just 42% of households have an IRA. True, IRAs aren't the only way to save for your old age. Many people pay into their workplace 401(k) or another pension plan. Indeed, about three-quarters have some form of retirement account. Some households pay into both.

Having a retirement account is a great start, but you also need to put money into it. The research shows only 15% of households contributed to their IRAs in 2022. We're facing a retirement crisis, and the sad truth is that huge numbers of older Americans do not have enough money to cover the cost of their retirement.

What to do if you don't have an IRA

Speaking personally, there have been times in my life when the list of financial "shoulds" has felt overwhelming. There are so many things we know we should do, including saving for retirement, paying down debt, and building an emergency fund. But knowing and doing are very different things.

The trick is to break those "shoulds" into bite-sized pieces and take it a step at a time. In terms of your retirement, the first step is to open an IRA, even if you aren't sure how you'll fund it.

1. Decide which type of IRA you want

If your workplace has a 401(k) and will match a portion of your contributions, start with this rather than an IRA. If not, think about which IRA will suit you best.

Here are some common ones:

• Traditional IRA: You contribute pre-tax dollars, which can reduce your tax bill right now. Let's say you're in the 22% tax bracket and put $6,000 into your IRA. That's $1,320 less in taxes right there.
• Roth IRA: You put post-tax dollars into a Roth IRA, so it won't cut your tax bill today. But that money then grows tax-free, and you don't pay taxes when you withdraw it later on.
• SEP and SIMPLE IRAs: These IRAs are designed for small business owners, freelancers, and self-employed people. The contribution limits are different from traditional IRAs.

Low-income households may also be able to take advantage of the Saver's Credit when they contribute to an IRA. Depending on how much you earn and how much you put into your IRA, you can get a credit to reduce your tax bill.

2. Compare brokerages

You'll find most IRA accounts at any top brokerage firm. If you're not sure which one to choose, consider factors like fees, usability, and how much the firm will help you build your nest egg. Look at what types of investments you'll be able to put in your IRA. If you might want to use a robo-advisor, make sure this is available.

To open an account, you'll need to provide personal information such as your name, address, and Social Security number.

3. Start making contributions

Once you have an account, that's one less barrier to saving for retirement. If you come into any unexpected cash -- like a bonus at work or a birthday gift -- you can put it straight into your IRA.

You don't have to start contributing straight away, but if you can, so much the better. Take a look at your recent spending and see if there are any areas you can cut back a little. If you can put $25 a week into your IRA, that's $100 a month.

To give you an idea of how your $100 a month might grow on the stock market, let's assume an average 8% annual return. There are no guarantees when it comes to investing, though history tells us that's not an unrealistic figure.

Bottom line

If you're one of the millions of Americans who don't have an IRA or any other retirement savings, try not to give up. The important thing is to take action now. Open a retirement account today and try to start making regular contributions, no matter how small.