Individual Retirement Accounts – Why You Should Consider an IRA Today

It is safe to assume that most people who are in the workforce today now about or at least have heard about individual retirement accounts, or IRAs. It is never too early to start planning for retirement, especially with the state that Social Security is in today. Individual retirement accounts are a way that workers can contribute money from their paycheck to their retirement plans without having to pay taxes on those funds. In other words, the funds are taken out of your pay and that reduces the amount of your taxable income. A lot of workers take advantage of individual retirement accounts in order to, not only contribute to their fund for when they are retired, but also to make their income tax work out a bit better in their favor.

There are several different types of individual retirement accounts:

  • Traditional IRA – The funds for this IRA are pre-tax funds, thus reducing the size of the worker’s taxable income for income tax purposes. Generally, transactions pertaining to and within the IRA are exempt from taxation, but, upon retiring, withdrawing monies from the account will be taxed as income.
  • Roth IRA – Funds in this IRA are added after the income has been taxed. All transactions within the IRA and even withdrawals after retirement are generally non-taxed.
  • SEP IRA – This used for small businesses or for those who are self employed. It enables them to contribute to an IRA in the employee’s name instead of a pension fund that was made in the name of the company instead.
  • SIMPLE IRA – This stands for “Savings Incentive Match Plan” and it is when the employer matches any contributions that the employee makes to their IRA.
  • Self-directed IRA – This type of IRA allows the owner of the account to invest on behalf of the entire account.

There are limitations to how much can be contributed to individual retirement accounts on an annual basis. The limitations usually vary by the year and the age of the person holding the individual retirement accounts. Also, you can withdraw monies from individual retirement accounts at any point of time, but there are few instances when you will not have to pay a penalty for doing so. There are many exceptions to the withdrawal penalty, but it really is just safe to assume that you should not withdraw money from your IRA until you are retired unless it you are in dire circumstances. That way, you know the money will be there when you are no longer working and when you will need it the most.

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