Why Invest in IRAs?
While workers from earlier generations could often rely on a monthly pension check for life, modern workers have no such luxury. Those workers need to save diligently and put money away for their own retirements, and an IRA account is one of the best vehicles for doing that. IRA accounts offer a number of advantages, both in terms of taxes and in terms of investment options.
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Immediate Tax Break
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If you are eligible for a traditional IRA, you can take an immediate tax deduction when you open and contribute to the account. You can deduct the money you contribute to a traditional IRA, whether or not you itemize your taxes. That makes the IRA deduction available to all eligible workers, thereby increasing the value of the money you put in. In addition, the funds you put into a traditional IRA are allowed to grow and compound on a tax-deferred basis, and you only pay taxes when you actually start drawing the money out.
Tax-Free Income
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Workers who opt for a Roth IRA instead do not get an immediate tax deduction. What they get instead is the promise of tax-free withdrawals when they retire. The steady stream of tax-free income a Roth IRA provides can be extremely valuable, especially for retirees in high tax brackets. In addition, the money in the Roth IRA grows tax-free for decades, boosting the return on the money and making it even more valuable.
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Investment Choices
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One drawback of workplace retirement plans like 401k and 403bs is that the investment choices can be somewhat limited. Many 401k and 403b plans offer only a handful of mutual funds, and in some cases those funds come saddled with high costs, poor performance, or both. With an IRA account, you can choose your own investments, including not only mutual funds, but individual stocks and fixed income choices as well.
Generous Limits
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The contribution limits for IRA accounts have risen steadily throughout the years, allowing workers to put away more and more money for retirement. These relatively generous contribution limits make it easier for employees to set aside the funds they will need in retirement. With traditional company pensions fast disappearing, it is up to every worker to save for a comfortable retirement, and an IRA can be an excellent tool for doing just that. As of 2011, you can contribute up to $5,000 to your traditional or Roth IRA, plus an extra $1,000 if you are 50 years of age or older.
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