An individual retirement account, or IRA, is an account set up by a financial institution that allows someone to save for retirement with tax-free growth or on a tax-deferred basis. The main types of IRAs are:
- Traditional IRA: With a traditional IRA, you make contributions with money, you may be able to deduct on your tax return. Any earnings can possibly grow tax-deferred until they are withdrawn in retirement. Since many retirees are in a lower tax bracket pre-retirement, the tax deferral means that it’s possible the money will be taxed at a lower rate.
- Roth IRA: With a Roth IRA, your contributions are done with money that you have already paid taxes on. Provided that certain conditions are met, your money may be able to grow tax-free with tax-free withdrawals in retirement.
- Rollover IRA: A rollover IRA is a traditional IRA intended for money that is “rolled over” from a retirement plan. Rollovers include any eligible assets from an employer-sponsored plan. This includes a 401(k) and a 403(b).
Why invest in an IRA?
An IRA helps you throughout retirement. Financial experts estimate that you potentially need 85% of your pre-retirement income into retirement. Employer-sponsored plans such as a 401(k) might not be enough to support this. However, you can contribute to both a 401(k) and an IRA.
Who can put money into an IRA?
Who can put money into an IRA depends on the type of IRA. With a traditional IRA, almost anyone can contribute. This is provided you (or your spouse) receive taxable income and are under the age of 70 ½. These contributions are tax-deductible if you meet certain qualifications. Roth IRA contributions are never tax deductible. Additionally, to contribute to a Roth IRA, you must meet certain income qualifications.
How much should I put in an IRA?
The amount you need to save depends on your financial plan. However, you should put as much as the government allows you to.
When can I access my IRA?
You can take money out of an IRA whenever you want. However, if you are under the age of 59 ½, you can be charged. A traditional IRA charges a 10% penalty on the amount you withdrawal in addition to the regular income tax you owe on a withdrawal. Roth IRA’s are more flexible. You are able to withdraw at any time, as long as you don’t withdraw earnings on your investments or dollars that were converted from a traditional IRA. If you are 59 ½ or older, you typically make penalty-free withdrawals from an IRA.