If you're going to have a shot at a financially strong retirement, you need to have a well prepared retirement plan in advance. In setting up such a plan, your choice of account type will be critical to your retirement financial future. There are so many retirement accounts available that you can use for many different purposes, but Individual Retirement Accounts (IRAs) rank near the very top in terms of what they offer as far as tax and other retirement benefits.
Two Main Types of Individual Retirement Account
The most common form of individual retirement account that most people are familiar with, is known as a Traditional IRA. The traditional IRA allows you to save and invest your money, while deferring taxes until such time that you choose to withdraw the invested funds. Only then, when presumably you are in a much lower tax bracket, would you actually pay any income tax on the money. The money you contribute to the traditional IRA has the additional benefit of reducing your taxable income at the time you earned the contributions, and it also accrues interest tax-free while invested in the IRA.
Traditional IRA vs. Roth IRA
The second type of individual retirement account that you will often hear about, is known as a Roth IRA. The Roth IRA is very similar to the traditional IRA, but with a couple of key differences. The biggest difference with the Roth IRA is that, unlike the traditional IRA, in a Roth your contributions are taxed at the time you deposit them, however they will then grow tax free and are not taxed at all on withdrawal. This can be extremely ideal if you are in a position at a younger age, to make maximum allowed contributions to the Roth IRA without the additional tax being too much of a burden. This money will then grow tax free for you for many decades, and become a tax free source of income when you need it during retirement.
Can Anyone Open an Individual Retirement Account?
There are actually some restrictions on exactly who can open up a traditional or Roth individual retirement account. Specifically as of this writing, with a traditional IRA, you must be less than 70.5 years old at the end of the calendar year. The Roth IRA however has no such age restrictions. If you are a single person earning no more than $95,000 or a married couple earning a combined income of $165,000 or less, you are fully eligible for whichever form of IRA you wish to set up. However if you earn more than those amounts, you may not qualify to open an individual retirement account. Always check with your certified public accountant or other tax and finance specialist about your own situation.
Details, Details...
There are numerous small details to starting an individual retirement account that you may need to consider. For example, the traditional IRA contributions are fully tax deductible, but only if you don't have a retirement plan provided to you by an employer. However the Roth IRA is fully deductible regardless. For both IRA types, there is a cap on how much you can contribute, and for those under 50 that limit is currently $4,000 per year, but if you are over 50 you can contribute up to $5,000 per year. Again, check with your financial adviser to see just how an individual retirement account may benefit your retirement investing. |
