First of all, what is an individual retirement account, or IRA as it is often called? Well, in this case, IRA does not stand for Irish Republican Army, nor does it stand for the International Reading Association, but it does have a lot to do with retirement and the investment made for that retirement! An individual retirement account is an account that is opened so that a person can save for their retirement, and as such it has benefits for that retirement over a regular savings plan. There are variations on this theme of course, and this website will provide more information about these valuable options.
So, why contribute to an individual retirement account in the first place? Contributions to an individual retirement account are made with pre-tax dollars, which means that when you withdraw funds from this type of account, the withdrawal will be taxed. However, it is assumed that this withdrawal will not take place until after you have retired, and by this time, it is expected that your income will be very much lower, so your withdrawal will be taxed at a lower rate. Because this is a savings account for retirement, you are strongly encouraged to keep your funds in this account, with the result that you are penalized should you decide to withdraw funds earlier for whatever reason.
The contributions must be made in cash, or in the equivalent of cash, as other assets are prohibited. You should know also that there is a maximum amount that you can contribute each year, and as this will be changing soon, you need to make sure that you have the latest information available. Basically for the year 2007, you are allowed to contribute $4,000 per year, or 100% of your earnings, whichever is the lesser amount, if you are younger than 50. If you are 50 or older, you may contribute $5,000 to an individual retirement plan, if your annual income is more than this amount.This is similar to the Canadian RRSP, or Registered Retirement Savings Plan, which allows Canadians to save a portion of their pre-tax income for their retirement.
So, what happens with your individual retirement account once you have deposited funds into it? This is where you need to make decisions ahead of time, and we will look in depth at this further into the site. However, basically, the custodian of the individual retirement account may, at the request of the IRA owner, invest these funds in say, stocks, bonds, or mutual funds, and this does mean that there is some risk attached to this kind of investment. As always, it is an excellent idea to talk with your financial planner before making these kinds of decisions, and make sure you are aware of the tax implications of any decision. You will have decisions like using a Roth IRA, or maybe a Simple IRA. Would a traditional individual retirement account be better, or a SEP IRA, or a self-directed individual retirement account. These are probably not decisions that you should make without the help of a financial advisor!
If you do not yet own an individual retirement account, then you need to read more, and decide if you can afford to put a little cash away each month so that you can have a more comfortable retirement. It's never too late, so dive into this site some more to help clarify some issues concerning individual retirement accounts.
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