In today’s economic environment, it’s no longer practical for people to rely on company pensions or government social security to carry them through their retirement. People need to take their retirement into their own hands, and there is no better way than through Individual Retirement Accounts. Individual Retirement Accounts (IRAs) are one of the most efficient ways for individuals to save for their own retirement. There are two main types of IRAs, traditional and Roth, and each has its own unique attributes, characteristics, and most importantly, tax benefits.
Traditional IRAs and Roth IRAs are individual retirement accounts that are maintained by financial institutions, but are set up and managed entirely by you, the investor. These accounts can contain any number of investments; stocks, bonds, mutual funds, even real estate or precious metals. The investments you make in your IRA can be extremely conservative, or aggressive, depending on your risk tolerance.
Yearly contributions to a Traditional IRAs reduce your Adjusted Gross Income (AGI) in the year you contribute money to the account (the maximum contribution for persons under 50 in 2008 is $5,000). However, when you withdraw the funds from this account after retirement, all the monies you take out are taxed. The main benefit of the Traditional IRA is the tax deduction in the year your contribution is made. Generally, traditional IRA’s are favored by individuals who want the tax deduction in their year they make a contribution.
Roth IRAs do not generate a tax benefit in the year contributions are made, so even though you contribute $5,000 (the maximum amount for 2008), there’s no tax benefit in that year. Upon retirement though, all monies withdrawn from the account are not taxed. This is the beauty of the Roth IRA, the long term potential to yield tremendous tax-free returns over long periods of time. Investing regularly early on in a Roth IRA, and allowing the money to grow for long periods of time can virtually ensure a large nest egg upon retirement. Generally, Roth IRAs are favored by individuals who don’t need a current year tax deduction (typically they are younger and in a lower tax bracket) and can allow the time value of money to work.
If you are ready to set up an IRA, it can be done at most banks, online brokerage houses, mutual fund companies, or large diversified insurance companies. Search around for the best deal and do your best not to pay account maintenance fees, or other costs, as these will slowly erode your yield over time. IRAs may contain any number of financial instruments including stocks, mutual funds, bonds, even real estate or precious metals.
Whether you decide on a traditional or Roth IRA, each one will enable you to save for your retirement. Taking your retirement and your future into your own hands can help you feel empowered and positive about your future. Best of luck in your investing and planning for your retirement.