IRAs offer an ideal way of saving for retirement. Their tax advantages provide compound growth over time as well as tax breaks.
Just about anyone with earned income can open an IRA. Traditional and Roth accounts each offer different rules and benefits.
Tax Deductions
An Individual Retirement Account (IRA) offers many tax breaks not available to other investment accounts; these benefits vary by account type.
Traditional IRA contributions may be tax-deductible; this benefit may decrease as your income rises and access is gained to an employer-sponsored retirement plan like 401(k). Withdrawals made after retirement will be taxed at ordinary income rates.
Simplified Employee Pension, or SEP IRA plans are tailored for self-employed individuals and small business owners who rely on self-employment income. Employers can contribute up to the lesser of either an employee’s compensation or 25% of net self-employment income indexed for inflation.
SIMPLE IRAs are similar to SEP IRAs but tailored specifically for businesses with 100 or fewer employees. Employees can make dollar-for-dollar matching contributions up to 2% of their salary; withdrawals made before age 59 1/2 will incur income taxes as well as an additional 10% federal penalty tax, but consistent contributions can help avoid this penalty tax altogether.
Tax Deferral
Tax deferral is one of the primary advantages of an IRA account. Funds invested in traditional, SEP, or SIMPLE IRA accounts grow tax-deferred until distribution. Furthermore, your contributions may qualify for tax deductions.
Your withdrawals from a traditional IRA or employer-sponsored retirement plan before age 59 1/2 may incur income taxes as well as a 10% penalty tax, which you can avoid by withdrawing funds during retirement when your tax bracket may be lower.
IRA accounts can be found through many financial institutions, including banks, brokerage firms, mutual fund companies and discount brokers. An investment professional can help you select an IRA suited to your particular circumstances – there are even special IRAs designed specifically for self-employed individuals, non-working spouses and gold investors! All IRAs must adhere to contribution limits.
Tax-Free Withdrawals
Your funds in an IRA generally won’t be subject to tax until you withdraw them, though an early withdrawal penalty of 10% could apply if you take money out before age 59 1/2.
Savings or investment IRAs offer you the chance to put money towards meeting your retirement goals, while for those seeking something less hands-on there are options such as robo-advisors or financial advisors to manage them for them.
Your options for opening an Individual Retirement Account (IRA), Roth IRA or Simplified Employee Pension plan (SEP) IRA include traditional, Roth and SEP plans. Traditional IRAs enable employees to deduct contributions from their taxable income while Roth IRAs use after-tax dollars and grow tax-free. SEP plans are ideal for self-employed persons or small business owners with few employees while SIMPLE IRA plans are designed specifically for businesses with 100 or fewer employees.
Investment Choices
Most IRA accounts place restrictions on the types of investments allowed within them; however, there are numerous options. Most investors choose mutual funds or exchange-traded funds (ETFs) due to their wide diversification and low risk profile; alternative options include individual stocks, rental real estate assets (REITs or private equity), precious metals such as physical gold as well as self-directed IRAs allowing investments with less oversight in terms of vetting these assets or investigating their promoter.
An IRA can be one of the best tools available if you don’t have access to a workplace retirement plan like a 401(k). Just remember that stocks often offer higher returns than more conservative investments like money market accounts and CDs; however, these may come with greater volatility; therefore it’s essential that you carefully weigh their risks against your long-term goals and risk appetite before deciding how best to proceed with investing.
