Important Things to Know About Your IRA Account
An Individual Retirement Account (IRA) is an individual retirement account. It is opened for the sole purpose of saving for retirement. It is a tax-advantaged retirement savings account that helps individuals save for their future after they stop working. They are held by over 59 million taxpayers and comprise of standard IRAs, Roth IRAs and more.
Contributions to an IRA are not taxable so long as the money stays in the account until it has been withdrawn, hence the name “tax-advantaged”.
The contributions are made pre-tax, which means that they reduce your income before taxes are calculated, thereby lowering the amount of taxes you have to pay on your income during that year.
Can you lose money in an IRA?
An Individual Retirement Account (IRA) is a form of tax-advantaged investment account that may help people plan for and save for retirement.
Individual retirement accounts (IRAs) provide for a wide choice of investments, but, as with any volatile investment, people may lose money if their IRA investments are impacted by market highs and lows.
What are the pros and cons of an IRA account?
The good news is, the Pros far outweigh the Cons.
PROS
An IRA allows you to grow your money tax-free over time until you are ready to withdraw it. You can invest your money in stocks, bonds, or mutual funds. The contributions are not subject to federal income tax at the time they are made.
An IRA can be contributed to by a large proportion of the population
If you (or your spouse) have taxable income and are under the age of 70 and a half, you can contribute to a regular IRA. However, your donations are only tax-deductible if you satisfy specific criteria.
Self-employed people and small company owners can use simple and SEP IRAs.
An IRA offers Tax-Sheltered Growth until you retire
When you contribute to a 401(k) or a deductible traditional IRA, the amount of your contribution is deducted from your taxable income. It should be remembered that this isn’t a long-term tax shelter though, because you’ll eventually have to pay taxes on that money.
Once you begin receiving payments in retirement, the IRS will begin collecting income tax.
Protection against bankruptcy
SEP and SIMPLE IRAs, like employer-sponsored 401(k)s, profit-sharing plans, and pensions, are completely protected in bankruptcy under the BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005.
Cons
- The penalty for early withdrawal is one of the disadvantages of the traditional IRA
- With a few notable exceptions (like college expenditures and a first-time home purchase), withdrawing from your pretax IRA before the age of 59 and a half will result in a 10% penalty
- This is in addition to the income taxes you’ll have to pay
Why is an IRA preferable to a 401K?
- An employer match is possible with a 401(k), but not with an IRA.
- An IRA often offers more investment options than a 401(k).
- If you have an IRA, you can avoid the 10% early withdrawal penalty for specified costs such as higher education, a first house purchase up to $10,000, or health insurance if you are jobless.
Is it possible to have two IRA accounts?
You can have as many IRA accounts as you like, but your contributions must stay below the yearly maximum for all of them.
Having numerous accounts provides you with additional options when it comes to taxes, investments, and withdrawals, but it might make managing your finances a little more difficult.
Wrapping up
An IRA is a retirement plan that is funded with after-tax dollars. This type of account has many benefits when compared to other types of retirement accounts.
For example, Roth IRAs offer access to your funds without penalties for withdrawing before you reach 59years old. They also offer tax-free growth and tax-free distributions.
Roth IRAs are funded by contributions made with after-tax dollars so it may seem like you are losing money when you contribute to the account, but this is not the case.
Instead, the money in the account grows totally tax free which means that when it comes time for distribution, you do not have to pay any taxes on any of your earnings or capital gains.
The only downside is that contributions made to a Roth IRA are not deductible from income
With inflation eating away at your bank savings, and interest rates on savings still far too low, there’s no better time to start your IRA planning.
