-
An Individual retirement account allows Americans to enjoy substantial tax benefits on retirement savings. A variety of financial institutions offer IRAs, from neighborhood credit unions to national banks and brokerages. Consumers can sign up for IRAs online or in person, sometimes with small initial deposits.
Accountholders can make deposits, also known as "contributions," until they reach retirement age. Many employers can deduct IRA contributions directly from paychecks. In other cases, accountholders can simply write a check or make an online transfer from a bank account to an IRA. Most IRAs can also facilitate automatic withdrawals to make investing even more convenient.
Upon reaching retirement age, accountholders can begin to make withdrawals, called "distributions," from their accounts. In fact, government rules mandate that account holders begin receiving distributions regularly once they reach a predetermined age. Taking distributions before the government's threshold age can trigger significant taxes, penalties and other forfeits. -
IRAs appeal to many Americans because of their tax advantages. Investors can choose different types of IRAs, depending on the source of their income and predictions about potential future taxes.
A traditional IRA offers tremendous incentives to small business owners, solo professionals and other working adults with federal tax obligations. In a traditional IRA, account holders contribute a portion of their pre-tax earnings. Account holders can then enjoy a tax deduction on their next federal income tax return, up to a limit set by lawmakers. Many Americans can offset tax burdens by contributing to IRAs, since distributions are taxed upon withdrawal at then-current rates.
Some Americans anticipate taxes on IRA distributions to grow over the coming decades. Others project their incomes to increase toward retirement, making it more attractive to pay tax on today's earnings at today's rates. Therefore, a Roth IRA offers consumers the ability to make contributions using after-tax dollars. At retirement age, account holders can receive distributions tax-free. To qualify for a Roth IRA, prospective investors must meet strict salary guidelines set by the government. According to many financial advisers, most Americans can enjoy more tax savings over the long term by investing in a Roth IRA instead of a traditional IRA. -
Because Individual Retirement Accounts can be offered by almost any kind of bank or brokerage, a consumer can choose the type of investment vehicle that best fits her personal risk strategy. For instance, a young American may prefer to invest in aggressive stocks and mutual funds. With earnings charts that look like roller coasters, these equities can potentially earn a far greater return over three or four decades than more conservative investments.
On the other hand, a consumer nearing retirement age may elect to invest in more stable index funds, real estate trusts or even money market funds. While these investments offer a lower rate of return, they protect older Americans from sudden market shifts that can wipe out up to half of a portfolio in a single year.
Although few financial advisers recommend suffering the penalties of taking early distributions, some financial institutions allow accountholders to take out low-interest loans with their IRAs as collateral. This strategy can benefit consumers holding credit cards with interest rates higher than an IRA's rate of return. Loans can be repaid through regular payroll deduction or through automatic withdrawal.
As with any investment, experts recommend consulting with a financial adviser or with a tax attorney prior to opening any specific account.
