The IRA is an Individual Retirement Account that was originally created by the United States Congress as a means of providing retirement savings with tax advantages to workers that were not already being covered under an employer-sponsored retirement plan. Unlike the standard 401(k) plan, the purpose of an IRA is not to require any sponsorship by an employer in order for a worker to qualify. These IRA accounts are capable of being opened directly through a number of different types of reputable fund companies, and they can also be invested in practically any type of asset imaginable unlike the traditional 401k plan which is limited to major classes of assets and pre-approved funds.
Traditional IRA or Roth IRA?
There are two primary flavors that IRAs are available in, which are Roth IRAs and Traditional IRAs. The way that these IRAs differ is in their tax treatments. While they do share the same contribution limit, which is $5,000 for the year 2009, and while they both carry an early withdrawal penalty of 10% if you take any money out before you reach the age of 59 and a half, they do have differences. There are other types of IRAs that are available as well including the SEP IRA and the Simple IRA, the non-deductible IRA and many others for example, but these specialty IRAs are not typically applicable to most investors and so we are not going to discuss them at length here.
Traditional IRAs allow for you to deduct your contributions much like a 401k in the current tax year. So if you were to contribute $5,000 to a traditional type of IRA for example this year, and you met the necessary requirements for eligibility, then you could deduct that $5,000 from your taxable income when you do your taxes this year which will allow you to avoid paying taxes on the contributions you made for a while. When you remove the amount during your retirement from your IRA, however, you are going to owe regular taxes on it, so there is a catch.
Roth IRAs are a more recent invention with a different way of handling taxes. The tax treatment offered by the Roth IRA is essentially just the opposite of the normal or traditional IRA. Rather than writing your contributions off every year, you pay the full income taxes on every dollar that you invest into a Roth IRA, but you will never owe any more taxes on your earnings or your contribution ever again meaning that all future withdrawals are going to be completely income tax free, 100 percent. This offers a really great investment opportunity to people of all ages, especially younger investors because they have lower incomes and will be in a lower tax bracket, allowing them to pay less taxes now and still be tax free in the future.
Photo Credits: anne.oeldorf
Originally posted 2009-07-23 05:51:15. Republished by Blog Post Promoter
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