Everything You Need to Know about IRAs and 401k’sIRA Accounts
What is an IRA Account?
An IRA account is a special type of savings or investment account created to help people save money for their retirement. IRAs provide you with tax breaks to help grow your retirement savings more rapidly than what you could in a traditional investment account.
Types of IRA Accounts
Two distinct types of IRAs exist: Roth IRAs and Traditional IRAs. A Traditional IRA is a type of account where the money you invest is not taxed. Any profits on your investment will not be taxed either, but you will need to pay taxes on any funds that you withdraw upon retirement. When you have a Roth IRA, you will not be taxed on any contributions. You will also not have to worry about paying taxes on any money that you withdraw from your account later down the line.
Traditional accounts are often used for those who are saving for their retirement. If you are in a higher tax bracket now, but you expect that to drop after retirement, these are the perfect IRAs for your needs. Those who anticipate being in a higher bracket upon retirement is better suited to invest in a Roth IRA. A Roth IRA is better for those who want a way to save for something specific such as a home or college. When you make direct contributions to the account, you will be able to withdraw them at any time without having to worry about penalties. Since the contributions are already taxed, you will not have to pay any additional fees when you take money out before retirement. If you have a contribution that is converted from a Traditional IRA into a different retirement account, it will need to stay a Roth for at least five years to avoid any penalties.
For those who do not have a 401k with their employer, an IRA is a great means for saving and investing money. You also have the option of opening an IRA on top of your 401k for multiple investments. Anyone with earned income has the option of opening their own Traditional IRA, providing they are under 70 years old. For a Roth IRA, there are no restrictions on age. Even a minor can have their own IRA as long as their income is enough to cover the cost of their contribution. An IRA is flexible in the options it offers you. It can be as simple as buying a CD at your bank or mutual funds, bonds and stocks.