INDIVIDUAL RETIREMENT ACCOUNT
IRA has changed the era of saving and retirement. The individual after the age of his fifties has relied on the savings of his past. It all happened through the medium of individual retirement account. The INDIVIDUAL RETIREMENT ACCOUNT brings together two tremendously powerful forces, both of which benefit you: Compound interest, and Tax savings.
IRA basically is a savings account with big tax breaks, making it an ideal way to sock away cash for your retirement. A lot of people mistakenly think an IRA itself is an investment – but it’s just the basket in which you keep stocks, bonds, mutual funds and other assets. An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.
It is a personal retirement savings plan available to anyone who receives taxable compensation during the year. For IRA contribution purposes, compensation includes wages, salaries, fees, tips, bonuses, commissions, taxable alimony, and separate maintenance payments.
“An individual retirement account (IRA) allows you to save money for retirement in a tax-advantaged way.”Money in the IRA grows free from the clutches of Government. That is, the income from interest, dividends and capital gains can compound each year without taxes nipping away at it.
In addition, you also can escape taxes on either the money you put into the plan initially or on the money you withdraw in retirement, depending upon whether you choose a traditional or Roth IRA. Here the catch is that government puts certain restrictions on the money you put into IRA in a year. The limit varies in different countries depending on its policies. Generally, the limit increases with the age.
If you’ve got money that you can afford to invest for the long term, there’s really no reason not to open an IRA. Lethargy is not a good reason. Inertia is not a good reason. Keeping your eyes wide shut about your future is not a good reason.
Compound interest becomes even more powerful when it is not held back by the drag coefficient of taxes. Here, the different types of IRA are explicated in front of you:
A traditional IRA is a tax-deferred retirement savings account. You pay taxes on your money only when you make withdrawals in retirement. Deferring taxes means all of your dividends, interest payments and capital gains can compound each year without being hindered by taxes – allowing an IRA to grow much faster than a taxable account.
A Roth IRA is a retirement savings account that allows your money to grow tax-free. You fund a Roth with after-tax dollars, meaning you’ve already paid taxes on the money you put into it. In return for no up-front tax break, your money grows and grows tax free, and when you withdraw at retirement, you pay no taxes. That’s right – every penny goes straight in your pocket.
A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. (SEP stands for Simplified Employee Pension.) Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee’s name. Employees of the business cannot contribute – the employer does. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.
Unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions. What makes a SIMPLE IRA unique is that the employer is required to make a contribution on the employee’s behalf – either a dollar-for-dollar match of up to 3% of salary or a flat 2% of pay – regardless of whether the employee contributes to the account.
SIMPLE IRAs have higher contribution limits than traditional and Roth IRAs, and it’s cheaper to set up and run a SIMPLE IRA plan than it is to administer many other workplace retirement plans.
To open an IRA, an individual must first establish an account with a bank, brokerage firm or mutual fund company. These firms then act in the capacity of a fiduciary. The individual is responsible for establishing the IRA and selecting the plan investments. Once the account has been established, the individual can contribute a maximum of several thousand dollars per year into an IRA.
The IRA plan, which was established in 1974 by Congress, has been an extremely popular retirement savings plan for workers for over thirty years. Taxes on Traditional IRA contributions and earnings are deferred until the account owner takes a distribution from the IRA. When money is withdrawn from a Traditional IRA it is taxed as regular income. Withdrawals are typically made when or after the plan owner has reached the age of 59 1/2. If the plan owner withdraws money from the account prior to retirement age, then he/she will incur a 10% penalty payable to the IRS.
Once the account has been established, the individual can contribute a maximum of several thousand dollars per year (the contribution limits often change annually; for instance, the limit for Traditional IRAs was $5,000 per person in 2010, or $6,000 for those 50 and over). Participants age 50 and over are often eligible to make additional “catch-up” contributions to their IRAs beginning in the year they turn 50, and investors are no longer allowed to make contributions to Traditional IRAs after the age of 70 1/2.
Annual Contribution Limit for IRAs
Year Limit 50+Limit
2010 $5,000 $6,000
2011 $5,000 $6,000
2012 $5,000 $6,000
According to 2015 and 2016 IRA rules, limits on contribution and income are $5,500 for those age 49 and under $6,500 for those age 50 and older.
In those golden years, you want to be able to go out and buy the gold-plated golf clubs, jet out to Hawaii to circle the big island on a dolphin’s back, savor the flavor of fine French food, make generous contributions to a cause that stirs your passions, or hire a trainer to help you get in shape for your Space Shuttle mission. You also want the opportunity to become your family’s Most Beloved Ancestor — the more you save, and the more you have at the end of the day, the more you’re likely to have left over to spread around to your heirs. So you’re really doing everyone a favor — yourself included.