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What Is An IRA?
Updated On September 5, 2023
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
General Questions
What is an IRA?
An IRA is an individual retirement account that helps you save and investment for retirement.
Retirement accounts such as an IRA enable you to fund your account with cash and receive tax benefits over time. You can use the cash in your IRA investment account to invest in stocks, bonds, mutual funds, ETFs and other investments. When you retire, you can withdraw these funds to help fund your retirement.
How do you choose the right IRA?
There are two main types of IRAs: a Traditional IRA and a Roth IRA. The main difference between a Traditional IRA and Roth IRA are the tax benefits.
- Traditional IRA: A Traditional IRA is the most popular form of IRA. When people ask “what is an IRA account,” this is the IRA retirement account of which they think. With a Traditional IRA, you contribute money each year that is tax deductible in your year of contribution. If you control your IRA investment with a self-directed IRA, you can then invest those funds.Your IRA investment can grow tax deferred, meaning you do not pay taxes when you sell your IRA investment for a profit. Rather, you pay taxes in retirement when you withdraw those funds. Therefore, a Traditional IRA makes most sense if you believe your tax rate is higher in the year you contribute to your Traditional IRA than it will be in retirement when you withdraw those funds.
- Roth IRA: With a Roth IRA, you contribute funds on an after-tax basis. This means that you do not receive a tax deduction in the year of your contribution. You can invest those funds through a self-directed IRA like you would with a Traditional IRA. The benefit of a Roth IRA is that you do not pay any taxes when you withdraw your retirement funds, and you can enjoy the profits of your IRA investment tax-free. A Roth IRA makes sense if you have a lower tax rate now than you will in the future. Roth IRA retirement accounts are not available to everyone, and are limited by your annual income.
What are the benefits of an IRA?
There are many benefits of an IRA
- Save For Retirement: Ability to save for retirement and supplement retirement income
- Tax Benefits: Ability to take advantage of tax benefits, including tax-deferred or tax-free growth
- More Investment Options: More flexibility than employer-sponsored investment options
- No Income Limitations: There are no income limits to enroll in a Traditional IRA
- Multiple Retirement Accounts: You can open a Traditional IRA account even if you have another retirement plan. However, you may not be able to take advantage of tax deductions.
- Estate Planning: You can pass your IRA investment account to your heirs
- Bankruptcy Protection: Your contributions to your Traditional IRA are shielded from creditors.
You should aim to contribute the maximum amount permitted by law to your IRA each year. As you come closer to our retirement, you may want to adjust your IRA investment choices to reflect your personal and financial preferences, goals and risk profile.
How do you open an IRA?
Opening retirement accounts is a simple process. You can open an IRA retirement account online in minutes. If you want to manage your investments through a self-directed IRA, you can choose the best online broker to set up an IRA retirement account.
If you want your IRA investment to be managed by someone, you can choose the best robo-advisors to provide an automated portfolio service that uses computer algorithms to invest in low-cost investments.
You will be asked to enter basic contact information and then fund your account through a wire transfer, check or bank transfer. You can also roll-over your 401(k) from a previous employer.
How much can you contribute to an IRA?
With a Traditional IRA, you can contribute $5,500 per year. If you are 50 or older, you can contribute $6,500 per year.
How do you withdraw from an IRA?
You should not withdraw from your IRA before you retire, or you could face a penalty. At 70 ½ years old, you must take mandator withdrawals from your IRA.
Beginning at age 59 ½, you can withdraw funds from your IRA investment account to pay for certain expenses.
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