Quora Answer: As an Independent Contractor, Should I Set Up an IRA, or Add to My Current Account?

The following is my answer to a Quora question: “I am an independent contractor. and make decent money.  I invest most of my savings in low-cost index funds, and stocks.  Should I also set up an IRA?  What advantages would it have over just adding to my current accounts?”

Since you use the term “IRA”, I am assuming that you are based in the US, and this answer is according to prevailing tax law there.  The US has a capital gains tax.  This means whatever you earn in your funds and equity holdings is subject to tax.  You may mitigate this by investing through some sort of vehicle, allowing you to expense out some expenditure to mitigate your tax liability.

However, the IRA allows you to defer your tax to when you take out from the fund, or when it reaches maturity.  Theoretically, this means one large lump sum tax bill, instead of a bill every financial year.  If you have a competent financial advisor, or you are confident that you are able to bring in a return that exceeds what you would nominally pay for that tax, and the prevailing rate of inflation, you could conceivably pay less tax than if you had paid that tax annually by not having your funds in an IRA.  The assumption here is that instead of paying your tax in the interim, you use that difference to invest further to increase your earnings, and allow it to compound for greater potential gain.  That is an “if”.