The abbreviation “IRA” stands for Individual Retirement Account and it allows people to save for their future retirement needs. If you have earned income, you can make IRA contributions up to certain limits set by the IRS.
IRAs can be a great tax-advantaged method for you to put money away for the future. There are two main types of IRAs that are commonly available:
1) ROTH IRA
With a ROTH IRA, monies can be contributed into a savings with taxes paid upfront to the government. A maximum income of $167,000 for a married couple, and a maximum income of $105,000 for an individual must be proved before a ROTH IRA can be opened.
At age 59 ½ you can begin withdrawing funds; however, this fund is flexible for early withdrawal. Dividends are earned based on an interest rate. Your ROTH IRA can grow with your yearly contributions and dividends to be part of a supplemental retirement package. If you are below age 50, you can contribute $5,000 a year maximum effective for tax year 2012.
2) Traditional IRA
Investing in a traditional IRA depends on your income. You must have a taxable income. Contributions are based on your gross income level of $125,000 or less if you are single and $183,000 if you are married. Monies are saved into this account tax free; however, upon withdrawal taxes must be paid on the amount of the withdrawal. Money in this account grows with contributions and interest payments.
Contributions are tax deductible, making a nice retirement savings for those within that particular tax bracket. Contributions can be withdrawn at age 70 ½ to supplement any other retirement plan that you may have. If you are over 50 years old, you can contribute up to $6,000 per year. This is part of the “catch up” method. If you are below age 50, you can contribute $5,000 a year maximum effective for tax year 2012.
Investing in either a ROTH or Traditional IRA can be considered a means to supplement other retirement benefits, such as a pension, 401k, and a regular savings account. Since these are retirement plans that you have to be committed to in regards to your contributions, you may try considering a “pay yourself first” attitude. Each pay day, take a portion of your pay and deposit in into an IRA.
Before you know it, those regular IRA contributions can add up to a larger retirement nest egg!
- cfa or cfp?,Peter Philipp@newportadvisory com,peter@newportadvisorysf com,RothIRAsvsTraditionalIRAs