IRA (Individual Retirement Account)-Types, Needs, Advantages, Why One Should Consider IRA?

What Is IRA (INDIVIDUAL RETIREMENT ACCOUNT) ?

The Individual Retirement Account (IRA) is one of the most powerful tax-advantaged savings options available today. IRAs allow individuals to save pre-tax income into a tax-deferred retirement account, and they provide a vehicle for converting after-tax contributions to a tax-free status.

In addition, individuals who reach age 70½ can contribute an additional $1 million in 2014 without incurring any federal income taxes and $500,000 without incurring any Social Security taxes.

An IRA is a type of individual retirement account that allows you to save for retirement without the worry of your money being taxed when you withdraw it in the future. This means that the money you save in an IRA is completely tax-free until you decide to take the funds and invest them in your own business or retirement account.

The amount you can contribute to an IRA is based on your annual income and is limited to a certain dollar amount.

In addition to being tax-deferred, you don’t have to pay taxes on contributions you make to an IRA. But you are not entirely tax-free, because you will owe taxes on withdrawals from the IRA. When you withdraw money from your IRA, the amount you take out will be taxed as ordinary income. If you are under 59½, the distribution is tax-free.

Individual Retirement Accounts are the best way to save your money and earn more.

You get to enjoy tax benefits if you deposit money into this kind of account.

This kind of account is completely safe as well because the money is not exposed to the market.

This kind of account is an ideal way to save your money in a tax-free environment.

5 ADVANTAGES OF IRA

Here are the five advantages of the IRAs:

1) No Taxes

As a rule of thumb you need to pay taxes on everything that you earn above $100k. However, the IRAs are completely tax-free.

2) Safe

The safest and most secure place to store your money is your retirement account. If you are in the risky environment then you should avoid it.

3) Tax-Deductible

If you have a job or you are self-employed, then you can deduct your taxes for the money you have saved in the retirement account.

4) Easy To Start

All you need to do is to open a new account. All you have to do is to select the type of account and invest it.

5) Liquid

If you have withdrawn any money from the IRAs in the past then you need to reinvest it. The IRAs are completely liquid and if you withdraw the money from it, then you will have to pay taxes.

If you are interested in building your own financial security then you must consider saving your money in the retirement accounts. If you are saving some money for your retirement, then you can invest them in the IRA.

 

3 MAIN TYPES OF IRA (INDIVIDUAL RETIREMENT ACCOUNT)

1.TRADITIONAL IRA

Traditional IRA is one of the safest investment options that an investor can have, and it has the ability to grow well and provide the maximum returns.

Traditionally, an IRA has been a tax-deferred plan, which means that taxes are not deducted on the contribution. In fact, there is no taxable event when money is invested into an IRA. On the contrary, if you withdraw money from it, then you have to pay the taxes.

This plan was introduced in 1972, and the purpose behind its creation was to help middle class investors to invest for their retirement years. However, this plan was designed to attract higher income earners, because at that time, lower income earners could not contribute to the pension scheme.

However, today’s conditions are different, and the traditional IRA can be used by anyone who wants to save for their retirement years.

Benefits Of Traditional IRA

1. Tax-Free Withdrawals

Most people are confused in knowing what the difference between a regular savings and IRA account. Well, a regular savings account is not a safe place to put your money because it can be taken away by the government. If you have a regular savings account, you can only withdraw it with penalty. You will have to pay 20% tax for any withdrawal from a savings account.

But if you invest in traditional IRA, you don’t need to pay any penalty. When you make an investment in traditional IRA, you are considered as an investor. You are treated as an individual instead of a business entity.

2. Higher Returns

In traditional IRA, you will receive a return of 12% to 15% a year on your investments. However, if you make an investment in a regular savings account, you will only earn around 6%.

3. Lifetime Income

With traditional IRA, you are not limited to just receive a return for a particular year. You can continue to invest for a lifetime.

2. ROTH IRA

It has been considered as one of the best ways to save money, it is one of the best financial options, but you need to know the importance and benefits of putting it in your retirement account.

Let us have a look at some of the things that you need to know about this investment.

Benefits Of Roth IRA

  • First of all, if you are new to investing and you want to learn about this account, then let me start with explaining the differences between the Traditional IRA and Roth IRA.
  • Roth IRA is different from the traditional IRA as they don’t offer any tax breaks, but they have some other benefits and these are:
  • If you are investing in the Traditional IRA, then you will be taxed when you withdraw the money, but you will not be taxed if you use that money for the purpose of retirement. The only thing that you will need to pay will be the taxes if you take the money out in the form of the regular income.
  • Another benefit of this type of account is that you can get an extra contribution for your child, which will be tax-free.
  • But the main benefit of a Roth IRA is that you will not be taxed on the amount that you contribute. When you deposit the money, the IRS will deduct the contribution made. The only thing that you will have to pay is the taxes when you withdraw the money.

How To Deposit And Withdrawal Money In Roth IRA ?

When you deposit the money into a Roth IRA, it is tax-deductible. And, you will be able to withdraw the money, but you will have to pay taxes, depending upon the age of the person who has deposited the money.

In this case, you will have to pay the taxes as per the IRS guidelines, which is 0% for those below the age of 50, but if the person is above the age of 70, then the taxes will be 10%.

You will be able to get an additional contribution to the Roth IRA, if you are investing in a company that offers a company stock plan. If the person gets the option, then you can get up to $1,000 per year.

When you decide to get a Roth IRA, it is important to make a comparison between the Traditional IRA and the Roth IRA, so that you can decide whether you should invest in this account or not.

3. SEP (Simplifies Employee Pension) IRA

It is an Individual Retirement Account that helps you save money for your retirement. These accounts are available to individuals, companies and self employed people. In this plan, the employer provides the money, the employee invests the funds and the plan is designed in such a way that it allows employees to invest money without any additional contribution from the employee.

This is not a traditional IRA plan that requires you to deposit a pre-set amount every year and you will receive an account statement showing the balance of your investments.

SEP IRAs are the new name of Self Employed Pension Plan. It is an individual retirement account for the employees who have started working with a company and are contributing money to it.

These accounts are designed to help the employees to save for their retirement and allow them to withdraw the money as needed.

Benefits Of  SEP IRA

There are a number of reasons why you should open a SEP IRA for 2019. Let’s have a look at the benefits of opening a SEP IRA.

1. It Is Convenient To Open A SEP IRA

With this plan, you can contribute a certain amount every month to your account. Unlike the other IRA plans, you will not need to make monthly contributions.

For example, if you want to start saving for your retirement and want to contribute $5,000 every month, then it is easier than having to contribute $1,500 every month. You just need to open a SEP IRA and choose your option for a particular investment product.

These products include Individual Account, SEP-401k, SEP-403b, and SEP-457.

2. It Is Possible To Deduct The Money From Your Taxable Income

The Internal Revenue Code (IRC) provides that you can deduct up to 50% of the total contribution to your SEP IRA.

3. There Are No Restrictions For Contribution

You can contribute to the account as much as you want. It does not matter whether you are a single or a couple. You can open a SEP IRA for yourself and your spouse.

4. It Has Flexible Withdrawal Options

If you wish to withdraw the money, you can do so anytime you want. You can choose to withdraw your contribution or the money that has been invested and earned interest.

If you choose to withdraw the money, you will be required to pay taxes on the withdrawn amount.

Why You Should Use Individual Retirement Account?

  • You can withdraw money from the Individual Retirement Account anytime.
  • You can even use this account to invest money.
  • No matter what happens, you won’t lose your money.
  • You don’t need any ID or proof of your income.
  • You can deposit your money up to $16000.
  • It provides a better tax advantage as compared to the other investments.
  • The withdrawal options are very easy in the case of IRA account.
  • The Individual Retirement Account is the best type of investment.
  • The Individual Retirement Account will help you to earn more money over a longer period of time.
  • The Individual Retirement Account will let you save money at the lowest cost.

Conclusion:

Individual Retirement Account is the best and most suitable option to make sure your future.

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