What Is an IRA?



IRA stand for either “individual retirement account” or “individual retirement arrangement.” The former is used more the latter.

IRAs are considered personal plans. The government allows for the existence of IRAs in order to encourage individuals to save for retirement. Individuals are able to put money into these accounts and invest the money for their retirement years.

How do IRAs encourage retirement saving?

These retirement accounts are tax-advantaged. The kind of tax benefit depends on the type of IRA you use. The most common IRAs are Traditional and Roth IRAs. Traditional IRA provide a tax benefit on the money you put into the account while Roth IRA provide a tax benefit on the money you take out of the account.

Other than the Traditional and Roth, here are some additional types of IRAs:

· SEP IRAs

· SIMPLE IRAs

· Self-directed IRAs

· Spousal IRAs

· Nondeductible IRAs

While the tax benefits are unique to each type of IRA, so are the contribution limits and penalties. As an example, the Roth IRA allows for 2020 contributions up $6,000 for the year if you’re under age 50 and $7,000 for the year if you’re over age 50. Your contribution is also limited by your annual income. For the Roth IRA, a withdrawal of earnings before the age of 59 ½ will result in a 10% penalty.

So, before opening an IRA, it is important to know the benefits, limits, and penalties of the account.

If you do not have a company sponsored plan (like a 401(k) or 403(b)), or if you have maxed out your company match, IRAs are a great option for your retirement savings. Spend some time exploring which IRA may be right for you.

© 2020 Art Rainer

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