Individual Retirement Accounts: The Core of Retirement Savings

Individual retirement accounts are something that everyone should consider looking into at some point. These accounts, also known as IRAs, present you with some unique advantages in saving for your retirement. Here are a few things to consider about individual retirement accounts and how they work.

IRA Basics

Understanding the power of the IRA can help you greatly in your pursuit of retirement. We all want to have enough money to live on comfortably when we get to retirement. The IRA can actually help you make that happen.

When you sign up for an IRA, you are given special advantages by the IRS. Once you start your IRA, you can begin to make contributions to it. The contributions that you make to the account will not be subject to tax. Many people have a certain amount deducted directly out of their paychecks before taxes are taken out. Funding the account with pre-tax money allows you to get more money into the account quickly. 

Once you deposit money into the account, you are then allowed to invest that money into a number of different things. You could invest in stocks, bonds, mutual funds and CDs. In fact, according to the government, the only things that you cannot invest in are life insurance policies, collectibles and personal property. Therefore, your options are plentiful when it comes to investing your funds from the IRA.

You can keep contributing money to your IRA and investing it over the years. The money is allowed to grow tax-free while it is in the account. Therefore, you could potentially develop your account to a very high value without ever worrying about taxes cutting into your profits. 

Once you reach the age of 59 1/2, you can start to withdraw money from the account. At that point, you will start paying taxes on the money as you take it out. It will be counted as income, and you will pay taxes on it based upon your tax bracket. 

Contribution Limits

Each year, you are subject to a limit that you can contribute to the IRA. If you are under the age of 50, you can contribute up to $5000 per year towards the IRA. If you are over the age of 50, you can contribute as much as $6000 per year in order to catch up to where you want to be. Beyond that, you cannot put any more money into your IRA. 

Part of Retirement Plan

The IRA is one of the core components of a successful retirement plan. However, it does not necessarily have to be your only retirement plan. If you work for an employer, you should most likely contribute to a 401k plan as well. Having a mix of different retirement accounts allows you to contribute as much money as possible to your retirement while taking advantage of different investments. 

Retirement Contribution

A retirement contribution is a certain amount of money that is put into a retirement account by an individual. This is the type of payment that is made into a 401(k), an IRA, a Roth IRA or any of the other retirement accounts that are available. This type of payment can be made on a pretax or an after-tax basis. With the 401(k) and the IRA, contributions are made on a pretax basis. With Roth IRAs and Roth 401(k)s, money is contributed on an after-tax basis. The size of the retirement contribution will be limited by an IRS law associated with each type of account.

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