What Is An IRA?

By Ashley Jones on January 11, 2010, 12:05 pm Posted in Finance News

When many of us think of retirement investing we think of the IRA but there are few of us who actually know what an IRA is. An IRA is an Individual Retirement Account. It is a tax free, or tax deferred, way to set away money to pay for future retirement. While all IRAs essentially have the same goal; to help you save for retirement, there are many different types or IRAs available.

Different Options

When choosing an IRA there are several things you need to consider; what type of investment you are looking for, how much you want to invest, and what your retirement goals are (including age and income level post retirement). Before you even consider seeing an accountant or retirement investment counselor you need to decide how much you want to have annually once you retire. Will you be using your retirement account to go on vacations or as a fail-safe for medical problems that may require a large sum long term, such as nursing home care? These are just a few things to run through on your way to invest.

Traditional IRAs

Traditional IRAs are simple and straight forward. You can set up to $4,000 a year aside, tax free, in your IRA account. Once you have reached retirement age, 59.5 years, you can withdraw funds from your IRA account. Once you begin withdrawing funds the money will be taxed at the current income tax rate. If you withdraw funds prior to the retirement age then the money will be subject to a 10% penalty.

 

Roth IRAs

A Roth IRA was established in 1997 for those who have little to invest but want to set something aside. With a Roth IRA, the money placed into the account is not tax-deductible however, there is no penalty for early withdraw. It is a good idea to review all of your investment options before you make a decision.

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