Start Saving for Your Retirement with IRA Accounts

Individual retirement accounts (IRA accounts) are savings accounts established by individuals for the purpose of funding their retirement savings. These accounts allow taxpayers to save a portion of their income while enjoying certain tax benefits.

There are two basic types of IRA accounts. Money contributed into a traditional IRA is often made with pre-tax dollars. This means that the money is placed into the IRA account before taxes are withheld. The earnings of the traditional IRA do not impact the account holder’s income. Deductions from IRA accounts usually occur after retirement age when most taxpayers’ tax liabilities are lessened. The ability to make the necessary contributions is the only requirement for establishing a traditional IRA. Contributions are limited and are based on the participant’s age. For 2011, the maximum investment is $6,000 per year.

Another popular IRA account is the Roth IRA. The primary difference in a Roth IRA and a traditional IRA is that contributions to the Roth are not made with pre-tax dollars. The advantage to the Roth is that the tax break comes when withdrawing the money during the retirement years. Fewer investment restrictions are placed on Roth accounts. As with traditional IRAs, the total investment amount is limited. A single taxpayer may make contributions of up to $6,000 per year. The spouse of the participating taxpayer may contribute up to an equal amount.

Perhaps the greatest advantage of the Roth IRA over the traditional IRA is that the Internal Revenue Services forces distributions of the traditional IRA based on the participant’s age. In a traditional IRA, mandatory withdrawals must begin by age of 70 (or thereabouts). If investors fail to make the required withdrawal, the IRS will automatically confiscate half of the mandatory amount. This mandate does not apply to Roth IRAs.

While the traditional and Roth IRA accounts are the most popular of the individual retirement accounts, there are a few more to consider. A simplified employee pension plan (SEP IRA) allow employers to forego the traditional company pension plans and instead contribute to traditional IRAs that have been established in the employee’s name. Just like traditional IRA accounts, SEP-IRA funds are taxed at ordinary income tax rates when withdrawals are taken after age 59 and a half. All contributions to a SEP IRA are tax deductible. As such, they lower a taxpayer’s current income tax liability.

Similar to a 401(k) plan, a Simple IRA allows both the employee and the employer to make contributions to the retirement account. It is funded by pre-tax dollars. Contributions to a Simple IRA plan are lower than for some other plans.

A Self-Directed IRA allows the account holder to make the investment opportunities for the account. The funds must still be maintained by a custodian and the IRS does impose some limitations on the type of investments that can be made.

It is never too early or too late to begin an IRA account. The sooner you begin saving for your retirement, the more secure your future will be. If you have delayed setting up an IRA account, there is still time. You simply cannot depend on Social Security to fund your retirement years.

While the decision to establish and maintain an IRA account is essential, it is equally important to decide which type of IRA will work best for you. This process can become a little confusing. We have resources to help you decide which IRA will best meet your retirement needs. Our website can provide you valuable information on rates and rules for various individual retirement account plans. Be sure to check out our customer reviews.