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Individual Retirement Accounts – Why You Should Consider an IRA Today

It is safe to assume that most people who are in the workforce today now about or at least have heard about individual retirement accounts, or IRAs. It is never too early to start planning for retirement, especially with the state that Social Security is in today. Individual retirement accounts are a way that workers can contribute money from their paycheck to their retirement plans without having to pay taxes on those funds. In other words, the funds are taken out of your pay and that reduces the amount of your taxable income. A lot of workers take advantage of individual retirement accounts in order to, not only contribute to their fund for when they are retired, but also to make their income tax work out a bit better in their favor.

There are several different types of individual retirement accounts:

  • Traditional IRA – The funds for this IRA are pre-tax funds, thus reducing the size of the worker’s taxable income for income tax purposes. Generally, transactions pertaining to and within the IRA are exempt from taxation, but, upon retiring, withdrawing monies from the account will be taxed as income.
  • Roth IRA – Funds in this IRA are added after the income has been taxed. All transactions within the IRA and even withdrawals after retirement are generally non-taxed.
  • SEP IRA – This used for small businesses or for those who are self employed. It enables them to contribute to an IRA in the employee’s name instead of a pension fund that was made in the name of the company instead.
  • SIMPLE IRA – This stands for “Savings Incentive Match Plan” and it is when the employer matches any contributions that the employee makes to their IRA.
  • Self-directed IRA – This type of IRA allows the owner of the account to invest on behalf of the entire account.

There are limitations to how much can be contributed to individual retirement accounts on an annual basis. The limitations usually vary by the year and the age of the person holding the individual retirement accounts. Also, you can withdraw monies from individual retirement accounts at any point of time, but there are few instances when you will not have to pay a penalty for doing so. There are many exceptions to the withdrawal penalty, but it really is just safe to assume that you should not withdraw money from your IRA until you are retired unless it you are in dire circumstances. That way, you know the money will be there when you are no longer working and when you will need it the most.

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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.

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Individual Retirement Accounts – The Four IRA Types

Individual retirement accounts, or IRAs, refer to an assortment of retirement plans in the United States. As a blanket term, the IRA may refer to traditional IRAs, Roth IRAs, SEP IRAs, or SIMPLE IRAs. The traditional IRA is the most basic account. This is a tax-deferred savings account in which taxes are only paid upon making withdrawals during retirement. All of the interest, capital gains, and dividends are compounded annually without being subjected to taxes, which means that your individual retirement account will grow much faster than any type of taxable account. They come in two forms: nondeductible and deductible, the latter of which is arguably the better deal because all IRA contributions are tax-deductible, meaning that you get a tax refund.

Roth IRAs are great because they allow all money in the account to grow and compound free from taxation. The Roth is funded with after-tax money, so you already pay the taxes on the funds up front before putting it into the retirement account. Paying taxes now with the Roth IRA means that you won’t pay taxes in retirement when you go to withdraw the funds. The Roth also comes with more built-in flexibility than traditional IRAs because you can withdraw contributions without penalty for qualifying reasons, or once you reach the age of 59 and a half.

SEP IRAs are for small business owners or self-employed individuals who want a type of traditional IRA. All contributions to the IRA are tax-deductible and the money will not be taxed until retirement, just like a traditional IRA. SEP IRAs also come with a higher contribution limit than traditional or Roth IRAs. This means that individuals can contribute as much as 25% of their income up to $49,000 a year.

SIMPLE IRA stands for Savings Incentive Match Plan for Employees and is also a traditional type of IRA specifically for small business owners and the self-employed. Like traditional IRAs, contributions are tax-deductible and will grow tax deferred until retirement. Whereas the SEP IRA doesn’t allow employees to make contributions, the SIMPLE IRA does. A SIMPLE IRA requires employers to make contributions on the behalf of the employees, essentially becoming an employer-matched retirement fund. It’s also cheaper to run than traditional, Roth, or SEP IRAs and is great for small business owners who want to bring in highly-qualified employees by offering attractive retirement benefits. Research all IRA employment and income restrictions carefully to see which IRA works best for you.

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Individual Retirement Accounts – Saving for Retirement

Preparing for retirement is a lengthy process that most people start decades in advance. One component of this savings process is setting up individual retirement accounts, or IRAs. These are one of the most reliable forms of investment, which can be an ideal supplement to a pension or 401(K) plan. To get started with learning more about whether or not IRAs are the right solution for your future retirement finances, it helps to look at their advantages and disadvantages. The advantages of IRAs include the fact that all contributions to these accounts are tax deferred. This means that you won’t have to pay any taxes on your account until you put it into use.

There are some situations in which your contributions to individual retirement accounts are tax deductible. You can check with the IRS or your personal accountant to learn more about how this works, because the rules tend to change almost every year. Another advantage of IRAs is that you can choose the investment allocation, whether it be certificates of deposit, stocks, bonds, or mutual funds. The amount of money that you invest is also left up to you, although it can be no more at this time than $5,000 per year, or $6,000 per year if you are over the age of 50. You can choose to stop paying money into this account at any time, unlike 401(K) plans or other retirement accounts.

Along with all of these benefits, there are a few disadvantages to think about as well, which is why it’s a good idea to balance out your individual retirement accounts with other types of savings as well. To begin with, if you access the money in your account before you reach retirement age, you will pay hefty fines. You may also not be able to deduct any contributions on your taxes, and will have to stick within the monetary limit for annual contributions.

To open up individual retirement accounts, you can get started by opening the account with your local bank or a brokerage firm. You can then discuss all of your various investment options as well, whether you want to invest for income, steady fixed-income, or growth returns. The provider of your IRA will help you choose the best types of funds to invest in, so that you can maximize your account to its best advantage. The main benefit of an IRA is that it can be so detailed and customized for each individual.

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