The term 'Individual Retirement Account (IRA)' is included in the Investments edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
An IRA stands for Individual Retirement Account. IRA’s offer two types of savings for retirement. They can either be tax free or tax deferred retirement plans. In the universe of IRA’s, numerous different types of accounts exist. These are principally either traditional and standard IRA’s or Roth IRA’s as the most popular types. The various IRA’s are helpful to different individuals based on the particular scenarios and end goals of every person.
Standard IRA’s permit contributions of as much as $4,000 every year. These are contributions that are tax deductible, giving the IRA’s their primary advantage as retirement accounts. People who are older than fifty are allowed to contribute more than the $4,000 maximum for the purposes of catching up for their approaching retirement. Any money put into the IRA is used to reduce your annual income amount, which lessens your overall tax liability for the year.
The tax is really only deferred though, since monies taken from an IRA will be taxed at the typical income tax rate for the individual when they are withdrawn, even if they are held in such an account until retirement. When the money is taken out earlier than this age of 59 ½, then an extra ten percent penalty is applied as well. There are exceptions to the penalty rule though. When these early withdrawn monies are utilized to buy a home or to pay for the tuition costs associated with higher education, then they are not penalized. The typical tax rate would still apply, although the penalty is waived in these two cases. This makes IRA’s a good vehicle for investments that also give you the versatility of making significant purchases with the money.
Roth IRA’s are the other principal type of IRA’s. The government established these types of IRA account back in 1997 in an effort to assist those Americans in the middle class with their retirement needs. Roth IRA’s do not turn out to be tax deductible. The upside is that they offer greater amounts of flexibility than do the typical IRA’s. These contributions are allowed to be taken out whenever you want without a penalty or extra tax. Interest that the account earns is taxed if taken out before the first five years have passed. At the end of five years, the earnings and contributions both made are capable of being taken out without having to pay either taxes or penalties. The identical housing and education allowances that permit to standard IRA’s pertain to Roth IRA’s. The principal attraction of Roth IRA’s is that they offer tax free income at retirement time.
It is worth noting that the Roth IRA’s have their particular rules that keep them from being for everybody. If your income is higher than $95,000 in a year, then you will be barred from making the full contribution, and if it exceeds $110,000, then you will not be allowed to make a partial contribution. For married, filing jointly, the limits are $150,000 for full contributions and $160,000 for partial contributions.