What is an IRA account? your questions answered
What is an IRA? The acronym IRA stands for Individual Retirement Account. It is a type of savings account, available in the United States, that is designed to allow people to save for retirement. There are tax benefits associated with paying into this type of account. Other countries have similar schemes.
The term IRA covers many different types of accounts. Choosing the right one means taking into account your individual circumstances. It can be a confusing decision to have to make.
The two main types of IRAs are traditional and Roth IRAs, although there are also SEP IRAs, SIMPLE IRAs, and self-directed IRAs.
The common feature of all IRA accounts is that payments into the account are tax-free or tax-deferred. Income taxes are paid on the money when it is withdrawn in retirement or before it is deposited into the account, but not both.
A traditional IRA is an account into which a person can put money to save for retirement, up to a certain annual limit. The limit increases for people over 50 years of age. The depositor does not have to pay taxes on the money he deposits in this type of account, but he does have to pay income taxes on everything he withdraws. If the money is withdrawn before age 60, an additional 10% penalty must be paid on top of the standard income tax. The penalty does not apply if the money will be used to pay for a home purchase or to pay for higher education.
A Roth IRA is more flexible. Money deposited in a Roth IRA is not tax deductible. However, withdrawals are not subject to income tax. There is no penalty for early withdrawals from this type of account, as long as the money has been in the account for at least five years. This type of account gives savers much more flexibility. It can also be financially beneficial because it is often less expensive to pay income taxes when you earn the money than it is in retirement.
There are other types of retirement account, such as a SEP IRA. SEP IRA is an acronym that stands for Simplified Employee Pension Investment Retirement Account. This is an account that an employer pays for the employee. This may be a better option than a company-name pension plan because administration costs are typically lower.
There is also the option of a SIMPLE IRA, in which both the employer and the employee can pay. This type of account is best suited to people who work for companies with few employees.
Choosing the right IRA can be a difficult process. You should take into account your current and future financial situation, and consider how much flexibility you are likely to need. If you find it difficult to choose the right account, you can hire the services of a professional financial planner to help you.