…and do you really need one?
IRA stands for Individual Retirement Account. Essentially, it is an account that provides you with certain tax advantages when you use it to save money for down the road (post-age 59 ½).
Depending on your income level, you may be able to take advantage of these benefits.
There are 2 types of IRAs – Traditional and Roth. We will discuss both.
A Traditional IRA, if eligible, allows you to put pre-tax dollars (meaning you don’t have to pay tax on this money) into the account. Within the account, you can purchase investments to allow the money to participate in whatever investment strategy makes the most sense for you. If the assets appreciate (go up in value), they do so tax-free until you take the money out of the account. You can’t take the money out of the account until you are 59 ½ years old without being subject to a penalty. There are few penalty-free exceptions such as medical expenses, first home purchase, and higher education expenses to name the most common ones. Nonetheless, the point is to fund this account with money you’d like to earmark for your future. Once you begin using this money, you will pay taxes on the withdrawals. The idea is that your tax bracket may be higher today than it will be when you retire so rather than paying tax on the money now, pay it at a lower rate when you’re in your 60s.
A Roth IRA, if eligible, allows you to put after-tax dollars (meaning you pay tax on this money today) into this account. Again, you can’t take the money out without penalties until you are 59 ½ years old. But at that time, you will NOT be taxed on any gains you have in the account. You receive the money tax free. This can make sense if you believe that your tax bracket will go up in the future. If that’s the case, you’re better to pay the tax on the money today, let it grow tax free and then take it out without paying any tax in the future.
The 2015 Contribution Limit is $5,500 – but there are rules….and these rules are not meant to be broken unless you want an IRS official on your doorstep which we can assure you, you do not!
Contact us to determine if you qualify and which account is best for you. As we discussed in a previous article, there are advantages to the IRA such as much lower fees than a 401k and many more investment options.