Saving for retirement helps ensure that your golden years are indeed golden. One of the best ways to stash cash for retirement is opening and funding an individual retirement account. Commonly known as an IRA, this savings vehicle offers you a relatively safe place to invest your nest egg.
What Is An IRA?
An IRA is a retirement account into which you deposit stocks, bonds, mutual funds and other assets. These assets are then allowed to grow on a tax deferred or tax free basis. Ideally, the investments in your IRA will grow in value over time accruing a substantial amount of money for your retirement years. You can open an IRA in addition to other types of retirement accounts, such as employer-sponsored 401(k)s.
Several types of IRA accounts exist, including traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs. Traditional and Roth IRAs are personal retirement accounts that offer different tax advantages. The money deposited into a traditional IRA is not taxed at the time of deposit, but is taxed when you remove the money. Roth IRA deposits are taxed when you make the deposit, but you pay no taxes when you withdraw the money. SEP IRAs are for self-employed individuals and SIMPLE IRAs are designed for small employers to offer their employees.
How IRAs Work
You are eligible to open and contribute to a personal IRA if you or your spouse (if you filed jointly) received taxable income during the year, and you were not age 70 by the end of the year. Allowable income for contribution purposes includes wages and salaries, commissions, self-employment income, alimony and nontaxable combat pay. A variety of financial institutions offer IRAs, including banks, savings and loans institutions, credit unions, brokerage firms and mutual fund companies. When you open an IRA, you deposit a specified amount of money and choose from various investments. Most IRA providers offer a variety of investment opportunities, including stocks and bonds, mutual funds, money market funds and CDs. This allows you to take advantage of a diversified mix of investments, which is a safe practice with your retirement money.
The Benefits Of An IRA
An IRA's biggest benefit is that your investments in the account grow on a tax deferred or tax free basis. This allows your money to grow faster than if you had to pay taxes on it each year. Additionally, the 10 percent penalty for early withdrawals also reduces your incentive to pull money out of your account. This helps to ensure that you will have sufficient funds on which to live when you retire.
It's Not Free To Open And Maintain An IRA
Banks and other financial institutions have varying fee structures for IRAs so it's a good idea to shop around. Some companies charge an annual account maintenance fee of $25 to $30, while others do not. There are also commission fees, which can range from as little as $7 to over $40.
You can open an IRA at any time of the year, but the money must be filed by the tax filing due date. If you deposit money into an IRA after the due date, it will be considered a contribution for the following year's taxes.
Now that you understand the benefits and basics of opening an IRA, you can make informed choices that are likely to help you enjoy full, vibrant retirement years.