IRA Basics – What is an IRA?

Over the next few weeks, we will be going over some basic options for retirement investments. One of the most common is the IRA. Though I hope this general information is helpful, please consult a financial professional before making any type of investment.

IRA stands for Individual Retirement Account, which is a common method of saving for retirement that either eliminates taxes or allows tax deferral. Although there are a variety of different IRAs that are suited for different financial goals, the most popular types of IRAs are the Traditional IRA and the Roth IRA.

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The basic difference between the Traditional IRA and the Roth IRA has to do with when the taxes are paid on the money in the account. A Traditional IRA features tax-deductible contributions up to $4,000 a year, unless you are over 50, but when the money in a Traditional IRA is withdrawn, it is subject to income taxes and a 10% penalty if it is withdrawn before the age of 59 ½. The penalty is waived if the money withdrawn is going toward the purchase of a house or to cover approved higher education expenses, but the income tax payment still applies.

Once you reach age 70 1/2, you must start taking distributions from your Traditional IRA. Also, if you file a joint tax return with your spouse, the maximum contribution you can make to your IRA doubles. Combined with the ease of setting up a Traditional IRA at almost any bank, brokerage, insurance company, or mutual fund, IRAs are an excellent way to prepare for retirement so that you and your spouse can live comfortably. There are plenty of investment options to choose from, allowing you to determine where exactly you want your money to go.