How an IRA Works
Roth and traditional Individual Retirement Accounts, or IRAs, each provide a different type of tax savings for money an individual puts aside for retirement. Both types of accounts are inexpensive to maintain and flexible.
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Misconceptions
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Many people think of an IRA as an investment. Instead, IRAs are a function of the IRS tax code. They are tax shelters, boxes inside of which individuals may place different types of financial products. While the assets sit inside an IRA, the money they earn is not subject to taxes.
Types
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The two most common types of IRAs that individuals open are Roth and traditional IRAs. Roth IRA contributions are taxed, but qualified withdrawals are tax-free. Traditional IRA contributions are tax deductible, but qualified distributions are taxed.
Considerations
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IRAs encourage individuals to put aside earned income for retirement and keep it there. The IRS imposes a penalty on funds that individuals withdraw from an account before they reach 59 1/2 years old. However, individuals can take penalty-free distributions to pay for or build their first home.
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