Do You Have A Retirement Plan?
Do You Have A Retirement Plan?What is an IRA?
IRA stands for an individual retirement account. It’s basically a savings account that gives a big tax break for taxpaying individuals to save money for the future. Many people mistaken IRAs as an investment; it’s technically an investment account you set up. Think of it like a basket that you store your stocks, bonds, mutual funds, etc. If you compare IRAs to 401(k)s, they are totally different. 401(k)s are accounts provided by your company while IRAs are account that you open up on your own. In IRAs, you add money to the account overtime and use it to purchase investments and eventually the money in the account can be taken out once you hit the designated retirement age.
Types of IRAs:
There are two types of IRAs, Traditional and Roth. The main difference between the two is when you pay income taxes on the money you put in.
- Traditional IRA - this is a good choice if you think your current tax rate is higher than the tax rate you’ll have in the future, at the time of retirement. This way the money you put in won’t be taxed until you withdraw it in the future, traditional IRA offers an upfront tax break. For example, let’s say your income is $40,000 and you contribute $5,000 to an IRA, the amount of your taxable income will be $35,000.
- Roth IRA – this is a good choice if you think that the future individual tax rate will rise and be higher than the current tax rate you have right now. In retirement, the amount you withdraw will not be taxed at all since you’ve already paid taxes when you made the contributions. For example, let’s say your income is $40,000 and you contribute $5,000 to an IRA, the amount of your taxable income will still be $40,000 and when you withdraw the $5,000 at retirement you won’t have to pay taxes.