What is an IRA Account? With constant news regarding the social security system being in jeopardy, more people are looking for alternatives and supplements for retirement income. One easy way to save for retirement is through an IRA. An IRA is an individual retirement arrangement (although most think it stands for account). The purpose is for individuals to be able to contribute annually to retirement savings and provides tax advantages in doing so.
There are two types of IRA accounts, the traditional and the Roth IRA. Today we are taking a look at the traditional IRA account. Why just the traditional? Mostly because I’ve wrote A LOT on the Roth and variety is the spice of life.
Savings to Your IRA Account
Almost anyone who has earned income can open and begin contributing to an IRA. Even minors are permitted to open IRA accounts as long as they have at some point earned income. The exception is that the IRA must be established before a person is 70 ½ years old.
How Much Can be Saved
The maximum amount that can be contributed to an IRA account each year is $5000. Once a person reaches age 50, they can begin contributing an additional $1000 annually for a total of $6000 in annual contributions.* There are penalties for early withdrawal, so once the money is invested in an IRA the investor should plan the money staying in the IRA account. Unlike a traditional savings account, withdrawals can not be made on a regular basis..
*contribution limits are subject to change
There are many benefits to opening an IRA account as early as possible:
- contributions are not taxed until the money is withdrawn
- the earlier one starts saving, the more money they will have saved or put aside for retirement
- the contribution reduces income for tax purposes
- there are exceptions for early withdrawal, so if you have an emergency you may be able to access the funds
How an IRA Works
Originally IRA’s were thought of as a way for those who do not have an employee sponsored 401(k) or 403(b) plan, to save for retirement. However, many people with a work related retirement plan also open an IRA for additional retirement savings.
Typically an IRA is set up through a bank or with the help of a financial adviser. It’s as easy as going online for an application and making an initial deposit. Once the account is open then the investor can decide how to fund the account. The most common and easy way is through CD’s. Stocks and bonds are also a great way to fund an IRA, however one must be familiar with the workings of the stock market or should consider hiring a broker.
With constant insecurity about the social security system and the ever lengthening life expectancy rate, people need more money for retirement then ever before. Establishing an IRA account as early as possible is a great way to help plan for the retirement life that you envision. If you haven’t started saving yet, there’s no better time to look into opening your own IRA account.