- An IRA helps you save for retirement.stack of cash image by jimcox40 from Fotolia.com
An Individual Retirement Arrangement, or IRA, account can be an effective vehicle for saving and investing. These accounts were designed to help workers accumulate the money they need to enjoy a comfortable retirement, and with pensions disappearing the need for these accounts has never been greater. Whether you are just starting your career or nearing retirement, you should learn all you can about starting and funding an IRA. - IRA accounts come in two distinct types--traditional IRAs and Roth IRAs. With a traditional IRA, workers can take a tax deduction for their IRA contributions, lowering the amount of taxes due or increasing the size of their tax refunds. The money invested in the traditional IRA grows tax-deferred until retirement, at which time the amount withdrawn each year is taxed as ordinary income.
With a Roth IRA there is no immediate tax break. But in exchange, the money accumulated in a Roth IRA can be withdrawn tax-free in retirement. When determining which type of IRA account is best, workers need to estimate whether or not they will be in a higher tax bracket when they retire. Those who feel taxes are heading up might want to opt for the tax-free status of the Roth IRA, while those who expect their incomes to drop in retirement might want to opt for a traditional IRA. - Not all income can be directed to an IRA. Only income from wages and employment can be placed in an IRA. Income derived from capital gains, dividends and interest rate not eligible. That means the account holder must have wages or employment income equal to or greater than the amount put into the IRA for that year.
- Since an IRA account is designed to be a retirement savings vehicle, the IRS imposes penalties that discourage the use of IRA funds for day-to-day expenses. IRA account holders who are under the age of 59-1/2 will face a 10 percent tax penalty if they withdraw the money in their accounts. In addition, the money withdrawn from the IRA is treated as ordinary income for tax purposes, meaning that taxes and penalties could eat up a substantial portion of the account. After age 59-1/2, IRA owners are free to begin withdrawing from their accounts, and once account holders reach age 70 1/2 they must begin taking distributions from the account.
- Workers are limited as to the amount they can contribute to their IRA accounts. These contribution limits change from time to time, but for 2010 the limit is $5,000 for workers 49 and under and $6,000 for those 50 years of age and older. Employees should check the current limits with the IRS, or with their tax preparer, before making their annual contributions.
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