The IRA is the best financial tool widely available to just about all of us. As we’ve discussed before,the traditional option of a pension is quickly becoming a fairy tale, or not even an option in some industries.
An IRA can be opened with numerous companies, in fact, you name them, they probably offer it. The basic principle behind the account is to add a portion of your income to some sort of investment vehicle like stocks, bonds, index funds, exchange traded funds, etc. and have your earnings grow tax deferred until you are ready to withdraw them at retirement. There are two basic types of IRA, a traditional and a Roth.
The two accounts are very similar. They both offer tax deferred growth on your money, which allows it to grow faster than if you were to pay taxes on your profits. Both accounts offer the same investment types as well and both accounts charge a penalty of 10% value on any funds withdrawn before retirement(59 1/2 years old).
The main difference between the accounts is how the taxes and contributions are handled. When contributing to a traditional IRA you pay taxes on the income as normal but have certain tax advantages and write offs in return . With a Roth IRA Qualified withdrawals are taken tax free. Deciding between the two is both a matter of personal opinion and income levels. Certain income levels allow for more tax breaks up front with the traditional IRA, but if you don’t qualify for the tax benefits, you’re better off in a Roth. You can check with the IRS to determine this years limits.