We all know that we should be saving up for retirement, but sometimes the terminology and concepts involved are confusing. After all, this wasn’t something most of us learned about in school. However, most financial planners believe that you will need at least 85 percent of your regular salary once you’re retired.

Some companies offer savings plans for their employees, but that may not always be the case. Or perhaps you would just like to maximize your retirement contributions and place yourself in a lower tax bracket. In either case, an Individual Retirement Account (IRA) can be a viable option.

Types of IRAs

An IRA is an individual retirement account that comes with certain tax benefits. There are three different versions available. In a traditional IRA, you store the money in the account before paying taxes on it. You only pay taxes on the money when you take it out and it becomes part of your “salary” for the year.

Since you would ideally be retired at that point, you would be in a lower tax bracket and pay a lower percentage of the money you saved. Placing money in an IRA also reduces your yearly taxable income. Although anyone can sign up for a traditional IRA account there may be limits placed on the amount you can deduct. These limitations are typically based on your income and your existent retirement plan or plans.

If you opt for a Roth IRA, you would end up paying taxes on the money before it goes into your account. As a result, you won’t have to pay any taxes on it when you take the money back out. There are also fewer restrictions on removing money from a Roth IRA account. However, the ability to have one of these accounts is based on your income levels.

The third type of IRA is a rollover account. These generally happen when your company sponsored savings plan ends up being privatized for some reason.

IRA Benefits

Having an IRA generally allows people under the age of 50 to save up to $5,500 a year on top of what they might already be saving in employer-sponsored retirement programs such a 401k. Older folks can save up to $1,000 more per year than their younger coworkers. IRA accounts are also a good option for people whose employers don’t offer a retirement plan, private contractors, or individuals who run their own business.

Where Does the Money Go?

The money stored in an IRA is placed in the hands of various companies that use the funds to purchase things which will hopefully acquire value over time such as stocks, bonds, and mutual funds. These items can eventually be cashed out to help people pay for their retirement. You typically aren’t allowed to take the money out before you are 59.5 years old, but there are some exceptions.

Signing Up For an IRA

Working with an online broker is advisable if you wish to manage your own investments, but other individuals may benefit from using a company that consistently provides them with advice on the process. However, you always should make sure that you are getting involved with a reputable company, no matter what savings plan you choose to start.

Places like the Better Business Bureau are a good place to double-check any organization that you plan on using. After all, you will need to give the company in question your money and a great deal of personal information (including your Social Security number) that you probably don’t want becoming public knowledge.


Image Credit: Stevepb via Pixabay.

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