IRA(s)
This is the thirteenth part of Investing Basics. You will learn what an IRA is, different types of IRAs, how they function and why they are quite beneficial.
What is an IRA?
An IRA (Individual Retirement Account) is a special account that helps you save money for retirement. There are two main types: Traditional IRA and Roth IRA. Here’s how each one works:
Traditional IRA
Tax Break Now: You can often deduct your contributions from your taxable income, which means you pay less in taxes for the year you contribute.
Tax-Deferred Growth: The money you put in grows without being taxed until you take it out.
Withdrawals: You can start taking money out without penalties at age 59½. When you withdraw, you’ll pay taxes on the money. If you take it out earlier, you might face a 10% penalty plus taxes, though there are some exceptions.
Required Withdrawals: Once you turn 73, you have to start taking out a minimum amount each year, and you’ll pay taxes on these withdrawals.
Roth IRA
No Tax Break Now: You contribute money that’s already been taxed, so you don’t get a tax break upfront.
Tax-Free Growth: Your money grows without being taxed, and when you take it out later, you don’t pay any taxes on it, as long as you’re at least 59½ and have had the account for at least five years.
Flexible Withdrawals: You can take out your contributions anytime without penalties or taxes. Earnings can also be withdrawn tax-free if certain conditions are met.
No Required Withdrawals: You’re not required to take money out during your lifetime, so you can leave it in the account as long as you want.
Contribution Limits
How Much You Can Contribute: For 2024, you can put in up to $6,500 a year. If you’re 50 or older, you can add an extra $1,000, for a total of $7,500.
Income Limits: Roth IRAs have income limits that might reduce or eliminate your ability to contribute if you earn too much. Traditional IRAs have limits on deductibility if you or your spouse have a retirement plan at work.
Investment Options
What You Can Invest In: IRAs let you invest in a variety of things like stocks, bonds, and mutual funds, depending on where you open your account.
Moving Your Money
Transferring Accounts: If you switch jobs or retire, you can move your IRA to another IRA or retirement account without paying taxes or penalties.
Summary
An IRA is a great way to save for retirement with some tax benefits. Whether you choose a Traditional IRA or Roth IRA depends on whether you want to get a tax break now or later.
