IRAs Explained - A Guide to Individual Retirement Accounts
Known officially by the IRS as Individual Retirement Arrangements (see Publication 590), IRAs are a way to save for retirement in a way that carries valuable tax advantages.
There are several types of IRA accounts. The most common IRA types are traditional IRA and the Roth IRA. Both provide tax deferred growth on funds invested inside of the IRA. However, the differences end there.
Traditional IRA Taxes
Traditional IRA accounts can be defined as having tax benefits up front and taxes to paid on the back.
Funds contributed to a traditional IRA account can be tax deductible for some taxpayers. Whether or not an IRA contribution is deductible depends on a lot of factors, but the biggest one is whether or not your employer offers a retirement plan. If they do not, then you will likely qualify for tax-deductible IRA contributions.
If your employer does offer a retirement plan of any kind then your ability to deduction IRA contributions depends upon your income level. Higher income taxpayers will not be able to deduct IRA contributions.
Note that is does not matter whether or not you participate in your employer's retirement plan offering, only whether or not they have one.
Roth IRA Taxes
Roth IRA accounts can be defined as having no tax benefits up front and having big tax benefits at the end.
Not deduction is allowed for contributions made to a Roth IRA account. However, all monies in a Roth IRA grow tax-free inside of the account including capital gains, interest, and dividends.
When Roth IRA withdrawals are made in retirement, after age 59 1/2 is reached, all money is tax-free. This tax-free income in retirement can be a huge financial planning bonus and allow for a much better lifestyle in retirement
Which is better an IRA or Roth IRA depends on many factors. However, if you cannot make deductible contributions to a traditional IRA, then the Roth IRA is much better than a regular IRA. However, you must meet certain income limits to be allowed to contribute to a Roth IRA.
However, there is a new tax code provision that will allow high income people to convert to Roth IRA accounts in 2010 regardless of how much income they have.
Additional IRA Account Types
- Rollover IRA Accounts
- SEP IRA Accounts
- SIMPLE IRA Accounts