What is an individual retirement account? An individual retirement account or IRA allows you to contribute money for retirement tax free. With individual retirement accounts, or IRAs, you can place money...
With individual retirement accounts, or IRAs, you can place money in these accounts and they are sheltered from ordinary income tax. So, on all the money that you put in an IRA, you do not owe any money to the government. On some IRAs, even when you start taking money out, those accounts may be tax-free. So the real benefit to an IRA when you put money in is tax deferral or tax-free gross. So, every penny you put in, you are not giving the money to the government right now. You are using it for you and that is creating more money as you go forward. So, this compounding or tax-deferred process is available to all these IRAs. The individual or Roth IRAs are subject to certain adjusted gross income requirements. So, if you are making $160,000 or your gross income is $160,000 or more per year, you are not going to be able to contribute to a Roth IRA, which is one of the better IRAs out there. You put your money in and at retirement, or 59 and a half to age 65, that money comes out totally tax-free.
But the benefit of any retirement plan or IRA is the fact that money is going in tax deferred over time and with these retirement plans, you have the ability to open them up at different firms. Whether it is Charles Schwab or someone else, you have a choice of investing in many different types of investments, whether it is individual stocks or bonds or mutual funds. You have control and choice over that money as well. Now the negative side of these IRAs is that you have to be careful to make sure you do not take money out before retirement age. There are certain exceptions where you can take money out for certain things like first time homebuyers, but for the most part, if you are under 59 and a half, and you take money out of these accounts, you may be penalized. There is a 10 percent penalty that may be taxed on the earnings on that money. You may be taxed on the whole thing, and it is going to kill the whole purpose of investing in this tax deferred way. So, mentally when you put money in these IRAs, you really should not touch this money at all until the age of 59 and a half to avoid penalties. There are other types of IRAs like SEP IRAs or simple IRAs that are more for small businesses or sole proprietors that will allow individuals or companies to put even more money away, but for most of us we are going to use the traditional IRAs or the Roth IRAs.
