IRA is nothing but the Individual Retirement Account. When the savings you make offers benefits of tax savings either in the form of deferred tax on savings or no tax on the withdrawal, it may be considered as an IRA. The IRA is simply an account that you may reserve for your retirement and it may include conservative bank products like CDs and money market savings and dynamic investments in the form of mutual funds or stocks. However, you can open an IRA account if you have an earned income and is a must to ensure your financial security during retirement if your employer does not offer 401(K).
Types of IRA
There are two types of IRA
- Traditional IRA that you can invest in bank or lenders of your choice
- Roth IRA which is a contract with insurance companies
The Traditional IRA
The Traditional IRA is a type of saving that promises benefits of tax-deferred growth. In other words, your money will be allowed to grow tax-free until the time you start taking distributions from it. When you start withdrawing, you will be paying the tax at the prevailing rate for your income slab. The contributions you make, however, are tax deductible. For example, if you are earning $45,000 per year and plan to save $2000 in a traditional IRA, you will have to pay income tax for only $42,000.
When is it advantageous to choose traditional IRA?
It is advantageous to choose traditional IRA and open an IRA when
- You want to save more money after having reached the maximum limit with respect to 401(K)
- You are not qualified for Roth IRA
- You anticipate that you will fall into the lower tax bracket when you retire.
- You will not be completing the age of 70 and a half by the end of the year
- You are not likely to withdraw funds from the traditional IRA before the age of 59 and a half.
- The traditional IRA is limited to a sum of $ 55OO per year. The contribution can be upto $6500 if your age is more than 50 by the end of the year.
The IRA offerings by banks
The IRA investments as far as the bank is concerned is limited to
- FDIC- insured CDs- This refers to the cash deposit receipts that are offered by banks or brokerage firms. The bank CD is a debt obligation of the issuing bank and the set interest rate the bank pays for it would be slightly higher than that paid for a general savings account. You can draw the interest at regular intervals and get the principal back on maturity or let it mature for the bank to repay the principal and the interest on maturity.
- Money market savings- The money market savings account can be considered as the safe method to keep your money invested and safe to use them in relatively near future.This is advantageous because you will be earning an interest for the period up to which it is kept
Benefits of traditional IRA
It is always better to open an IRA that is savings oriented in abank because of the following benefits
- You can consider it a low-risk investment
- It has the potential to offer stable returns
- You can expect to have modest returns of a stable kind every year.
- There is no annual or custodial fee linked to the investment.
Open an IRA of the traditional kind to ensure that your money is safe and at the same time earns an interest that will keep you comfortable during your retirement.