Published July 16, 2013
When it comes to planning for retirement—Americans are behind the curve. A recent survey conducted by an independent research firm for the TIAA-CREF found that over half of those surveyed do not understand what an IRA is. It should be no surprise then that around 80% report that they indeed do not make regular contributions to an IRA.
What is an IRA?
IRA stands for “Individual Retirement Account”. While the IRA comes in a number of shapes and sizes, the common theme for all IRAs is that it allows individuals to put away savings for retirement in a tax deductible or tax free manner.
What are the different types of IRAs?
The two main types of IRAs that you here about normally are the traditional IRA and the Roth IRA. On first glance, these two types of investment savings may seem identical, but they actually have several key distinctions.
Other less well known IRAs includes:
What are the advantages of an IRA?
The primary advantage of the IRA is in essence represented in the following term: compound interest. No matter the type of IRA account you choose, if you make regular contributions from an early age, you will be left with quite a nest egg by the time you reach retirement age.
For example, if at the age of 23 you started to contribute the maximum of $5,000 a year to an IRA, by the time you hit 63, assuming stable returns, you would be sitting on over $2 million. If you had a Roth IRA, you could start making withdrawals from that $2 million account tax-free.
After examining options at over 70 account providers in the U.S., NerdWallet found these to be the top Roth IRAs worth opening:
|Brokerage Company||# No Transaction Fee (NTF) Funds||S&P500 Index Expense Ratio||Minimum to Start||$/ Stock Trade||Perfect For:||Why?|
|3,100+||0.095%||$250||$7.00||Low Cost, Long-term Investor||Low cost mutual funds and stock trades, very large selection of mutual funds (14,500+)|
|2,500+||0.170%||$2500||$9.95||Involved Investor||Access to research, analysis software, and best in industry customer service|
|4,500+||0.170%||$2500||$8.95||Sophisticated Investor||Advanced trading platforms; Free streaming quotes & broker access|
|1,300+||0.200%||$500||$9.99||Day Traders||Investment Research & Platform for serious investors|
|400+||0.170%||$250||$6.95||New Investors||Lowest minimum to get started and low trading fees on stocks|
What are the limitations of an IRA?
There are yearly maximums that the federal government enforces, so forget about stashing away all of your yearly savings away from the purview of the taxman. If you are under the age of 50, you are limited to a maximum deposit of $5,000 a year. Furthermore, if you have to dip into your IRA before you hit the age of 50 ½, you will be forced to pay a penalty fee of 10%. This fee is waived if you are withdrawing money to pay for the following expenses:
One other exception is if you have just recently put away your yearly contribution to your IRA and then soon after decide you want it back. You can get your money returned as long as it is before you have filed your taxes and subsequently abstain from listing the amount withdrawn and returned as a tax deductible amount in your returns.
Before writing IRAs off as another complicated retirement tool described in gibberish, consider writing off your taxes on a million dollar retirement savings plan instead. IRAs may seem complicated on first glance, but in fact are fairly basic and can yield extraordinary savings.
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