An IRA (Individual Retirement Accounts) is a great retirement savings tool. The money you invest in an IRA can give you tax savings as opposed to other money that you may be saving outside of retirement accounts. You need to understand IRAs before you open one, so that you can choose the one that is right for you. If you decide to change types of IRAs you should simply open a new one, and leave your current one alone, that way you won’t take any tax hits on your current IRA. You are limited to contributing $5000.00 to an IRA a year. Start contributing now so you do not have to catch up on retirement savings later.
1. Traditional IRA
A traditional IRA has a lot of advantages. This IRA allows you to make contributions to your account with pretax dollars. You can use this IRA to lower your taxable income, and thus lower the amount that you have to pay in taxes. You do not pay taxes on this account until you begin to make withdrawals at the age of 59 ½. When you do begin making withdrawals you will be charged at your current tax rate. Additionally any early withdrawals are penalized.2. Roth IRA
A Roth IRA also has advantages. The Roth IRA’s contributions are made with after tax dollars. This means that it does not lower you taxable income. The advantage is that your earnings grow tax free, and your withdrawals are made tax-free. This means that you will not have to pay taxes on this money when you retire. You will be penalized for early withdrawals, so you will need to wait until you are 59 ½ to start pulling the money.3. Which IRA Should I Choose?
You may be wondering which IRA is the best choice for you. This decision needs to be made with careful thought and consideration. Your money will likely be taxed at a lower rate with a traditional IRA, with the assumption that you will be making less money once you have retired. However with a Roth you will pay taxes on a smaller amount of money since you will only pay money on your contributions and not on your earnings.4. Where Should I Open an IRA?
You have several options when it comes to opening up an IRA account. An IRA account is not available through your employer, so you will need to find a bank or an investing firm to open your account. Banks may have an investing branch that you can go through as well. When you use an investing service through your bank, the FDIC does not guarantee the money. Banks usually offer IRA CDs as the investment portion of your IRA. These rates are low, and your money will not grow as fast, but it is secure. An investing firm will allow you to invest in mutual funds or other products, with a higher rate of return, but your money is not as safe.
