Retirement Investment Vehicles – Individual Retirement Accounts
Retirement plans are important plans that every American should begin considering as soon as they begin working. There are a variety of retirement investment vehicles that can help a person save and plan for retirement. One of the most common investment vehicles for retirement is called individual retirement accounts, also known as an IRA. These accounts have a certain limit that can be invested in them per year. There are different types of IRAs that a person can use to invest in. There are Traditional IRAs, Roth IRAs and SEP IRAs. Each of these types allows people to invest for their retirement.
Traditional individual retirement accounts provide individuals with the ability to invest a tax deductible amount each year into an account that is used for investments. These accounts are usually managed by an investment management company who invests in various funds similar to mutual funds. Some retirement accounts do invest in mutual funds. Traditional IRAs provide an initial tax deduction for the year the money was invested, but when the funds are withdrawn either in a lump sum or in disbursement across a person’s retirement, they are responsible for paying the taxes as income tax in the amount that is required at that time. The advantage is the tax deductible investment today, and the disadvantage is the higher tax rate that the investor will pay during their retirement.
When people invest in Roth individual retirement accounts the tax is paid when the money is invested. There are no additional taxes that are taken out at the time the money is paid out. This can be an important factor for many people since the amount of taxes are assumed to be higher in the future than they are today. Many people chose to invest in a Roth IRA when they do not want to pay a higher rate of taxes later.
When business owners want to take advantage of individual retirement accounts, they can invest in SEP individual retirement accounts. This is a specific type of IRS account that allows an investor to invest a much higher dollar amount in per year. Many business owners who do not have employees chose this as a retirement savings option for themselves. Many times the contribution can be as much as 25% of the business owner’s income for each year. This is a much higher amount than the allowed amount in either the traditional or Roth IRAs.