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What is an IRA?
An IRA (Individual Retirement Account) is an investment vehicle that allows you to save money for your retirement, tax deferred. IRAs were designed by the government as a way to encourage Americans to invest for their own retirements and stop depending entirely on Social Security for living expenses.
What are the main benefits of an IRA?
- Taxes on the interest earned in an IRA are tax deferred. This means you don't have to pay taxes until you begin withdrawing the money at retirement. Why is this important?
Tax deferred earnings allow you to "earn interest on the interest" which boosts the total earnings tremendously over a several year period.
And when you do ultimately have to start paying the taxes, you'll be taxed only on the actual amount you withdraw each year and you'll probably be in a lower tax bracket than you're in right now.
- Your annual IRA contributions are tax deductible which allows you to pay less taxes on your current income!
- You don't have to worry about the details of your investments. You can open an IRA with a good mutual fund, make your IRA contributions (and deduct them), and forget about it until the next year.
How much can I contribute to an IRA each year?
You can contribute up to $3,000 per year to your IRA account (provided that you earned at least that much). If you're over 50 years of age you're allowed to make a "catch-up" contribution in the amount of $500.
When is the best time to begin contributing to an IRA?
Right now, today! The younger you are when you start, the better! Because of the power of compounded interest combined with tax deferral, a young person just starting out in the working world today can easily retire a millionaire simply by investing the maximum allowed contribution each year in a good IRA plan.
When will I have to start withdrawing money from an IRA?
You must begin taking IRA distributions by April 1 of the year after you reach the age of 70 1/2.
How soon can I start withdrawing money from my IRA account?
You can take an IRA distribution at any time, but (with a
few exceptions) distributions taken before you reach the
age of 59 1/2 will require the payment of regular income tax and a 10% excise tax (ouch!). For this reason, you shouldn't withdraw money from your IRA before reaching that age unless absolutely necessary.
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