IRA

An IRA is an excellent way to save money for your golden years. Any financial advisor will tell you that when saving for retirement it is important to start early and save as much as you can afford. Those who use a Traditional or a Roth IRA plan may watch their savings grow and may realize tax benefits along the way. Talk to a financial advisor today to determine if an IRA is a good retirement savings plan for you.

Traditional IRA

The Traditional IRA, or individual retirement account was established in 1986. Similar to the 401k retirement plan, it was designed to provide individuals a way to contribute funds to an account that could be invested in a variety of stocks, bonds, and mutual funds thus providing potential earnings on the contributions. A bank or a brokerage normally manages this program. The manager of the account controls the investment options that are allowed. For instance, a bank might only allow certificates of deposit investments or CDs, while a brokerage firm may have stocks, bonds, or mutual fund investments available.

A traditional fund has excellent taxation benefits for eligible contributors. For one thing, the contributions are tax deductible. The earnings are also tax deferred, meaning that as long as they remain in the account, they will not be taxed. Once the earnings are distributed, the recipient will need to pay the taxes at that time. One of the disadvantages to a traditional individual retirement account is the required distributions that take effect when the contributor reaches the age of 70 1/2. These required distribution amounts are mandatory and vary based on several different criteria. If the owner fails to withdraw the appropriate amounts, the penalties can be as high as 50% of the required withdrawals.

Roth IRA

A Roth IRA, or individual retirement arrangement, was named for the late Senator William Roth, who was a chief sponsor of the program. A Roth arrangement allows individuals to save for retirement in an investment and savings plan that includes options to invest in stocks, mutual funds, and sometimes even real estate. The advantages of a Roth plan over the traditional plan are its taxation benefits. In a Roth individual retirement plan, the contributions are made after tax and so are not taxable on withdrawal. The earnings can also be tax free if withdrawn after the appropriate timeframe called a seasoning period, and if the investor has reached the age of 59 ½. They may also be withdrawn for eligible tax-free items such as buying a home. Contributions may be withdrawn tax-free at anytime.

Another advantage of the Roth individual retirement arrangement is the lack of required distributions. Because the taxes have already been paid before the contributions were made, the Internal Revenue Service allows the investor to leave the money in the account indefinitely, or even pass it on to beneficiaries if that is their desire. This is an excellent way to provide college education funds for your grandchildren or great-grandchildren.

One of the disadvantages of a Roth individual retirement account is the fact that the contributions are not tax deductible as they are in the traditional retirement plan. Another disadvantage is the income limits that are in effect for contributors. Other types of retirement plans such as a 401k do not impose income limits to the investors.

Converting a IRA

Conversions may be made from a traditional plan into a Roth plan. Funds that are rolled over from a traditional plan into a Roth IRA become eligible for tax payments in the year of the conversion. Meaning that if you roll over your funds into the Roth IRA, the rolled over amounts must be reported as income on your next tax return and pay the taxes at that time. This is because normal contributions to a Roth IRA are made post tax and are not tax deductible, and so are not taxable upon withdrawal unlike the traditional IRA, which allows a tax deduction for the contributions.

Conversions may also be made from a 401k plan into a traditional or Roth IRA.When converting 401k monies into the traditional retirement savings account, you will not have to pay the taxes as long as you roll the money into the account within 60 days of receiving it. If you roll it into a Roth account, you will need to report the rollover on your taxes as taxable income. Again, this is a requirement because contributions into a 401k plan are made pre-tax.

An IRA plan can be an excellent way of saving for retirement. Whether you are just starting out in the workforce, or planning parenthood, you can start a retirement savings plan today and start ensuring your financial future for tomorrow. Talk to an investment advisor before contributing to an IRA plan to determine what the best one if for the needs you have.

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