Individual retirement accounts provide the maximum benefit when you start saving young. While that may seem obvious, too many Americans of all ages have inadequate savings for their golden years.
An individual retirement account (IRA) is a good tool to build retirement funds. This type of account has been offered since 1974 and is an investment or savings product (mutual funds, stocks, bonds, certificates of deposit) that comes with special tax advantages. An IRA can be opened through a financial institution such as a bank, credit union, mutual fund company, or brokerage firm. Two common types of IRAs are the traditional IRA and the Roth IRA.
Roth IRAs (named after their creator the former Senator from Delaware) are the best thing since sliced bread. With regard to investing for young people, they’re usually the best option.
They work just like savings accounts. That is, you get money from your job or business, and stash it away in your Roth. Any amount that you put in is called a contribution. You can remove your contributions at any time without incurring taxes or penalties.
Once you make the contributions, your account is funded, and you start using your contributions to purchase investments.There are a plethora of investments that qualify.
Roth IRA Guide
The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA’s principal difference from most other tax advantaged retirement plans is that, rather than granting a tax break for money placed into the plan, the tax break is granted on the money withdrawn from the plan. Roth IRAs allow an annual contribution of up to $5,000 ($6,000 if you’re age 50 or older), as long as you earn at least as much as you contribute.
As a retirement plan, Roth IRAs differ from regular IRAs in some interesting — and important — ways.
There is an income threshold on the Roth IRA. If you make too much money, you can’t play the Roth game. You start losing the ability to contribute to a Roth IRA if your income is over $125,000 and you’re single, or over $183,000 if you’re married and filing a joint tax return.
There is no age limit with the Roth IRA. You can make contributions no matter how old you get. With a regular IRA, you have to stop making contributions in the year in which you hit age 70-1/2.
There is no age requirement for mandatory withdrawals of money from the Roth IRA. You are required to start taking money out of a regular IRA in the year in which you reach age 70-1⁄2.
For the Roth, you never have to take the money out: You can leave the money invested until you die and the investments then get passed on to your beneficiaries. Furthermore, when you do start withdrawing money, you can withdraw as little or as much as you want — there is no required withdrawal formula like there is with the traditional IRA.
An advantage of the Roth IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements. Transactions inside an account (including capital gains, dividends, and interest) do not incur a current tax liability. Withdrawals are tax-free, but not without certain stipulations (i.e., tax free for principal withdrawals and the owner’s age must be at least 59½ for tax free withdrawals on the growth portion above principal).
While many companies offer their own retirement plan known as a 401K, only some do, so people who work for a small firm or are self employed, are unable to reap the benefits. Those that do however can greatly enhance their retirement if the employer offers matching contributions.
There are many different kinds of retirement savings plans, from the Roth IRAs to the 401K and the Traditional IRA. There are more options, and it is easy to start investing for retirement, no matter who you are or what you do. Even if there are certain conditions that have to be met, this is a smart choice and should not be overlooked. But again because it is human nature not to see the distant future after you are no longer working, this perceived abstract timeline becomes very real, when you retire, so start saving and investing right away.