Individual Retirement Account is retirement account that provides tax benefits for retirement savings. There are different types of IRA accounts depends on the needs of the consumers some of them are employer provided while some are self provided plans. Types of IRA’s are Roth IRA, traditional IRA, SEP IRA (Self employed Individual), Simple IRA and Self directed IRA. There are options as per the requirements of the customer.
It is the decision of the investor to decide which IRA is beneficial for him. This is best way to save money and enjoy the tax benefits after retirement. Different IRA has different tax benefits. To enjoy the tax benefits it is advisable for the investor to deposit money before the April 15 to get credit of the previous tax year. There are similarities between IRA and employer-sponsored 401(k) plans. Investors are also allowed to keep both the accounts but if you withdraw money before the time of retirement you may be charged with penalty.
Traditional IRA
In a Traditional IRA the investor gets the benefit of tax deduction as he donates to the account, and the claims of the taxes are also deductible. The main advantage of traditional IRA is the benefit of tax deductible. For instance if a person
deposits $4000 in the traditional IRA so its twenty-five percent will be marginal then $1000 will be the benefit will be given for the year. There is a yearly limit of amount to be deposited in the traditional IRA and it may change on timely basis. If the person has a regular income then it may subject to taxation during the time of retirement, and on the other hand if withdrawals done before retirement will be charged with penalty. Traditional IRA offers incentives if the person has a lower tax bracket during retirement.
Roth IRA
Roth IRA is named for its chief legislative sponsor, William Roth the late Senator of Delaware. This is an another type of IRA in which the person will not get tax benefits immediately so in this account the amount of claimed taxes will not get reduced. In Roth IRA the amount will be invested in various investments like mutual funds, securities or certificates of deposit. If a person withdraws early then the retirement then he will not be charged with the penalty. There is not tax in case of long-term capital gains but the benefits from investment earnings will be taxable income.
Additional IRA
There are many retirement saving options besides Traditional IRA and Roth IRA. Every IRA has different benefits and plans. A SEP IRA is beneficial to business owners to provide retirement benefits to owner and employees. A SIMPLE IRA is beneficial for the employees to save money and use it later when needed and is setup for the employer-provided plan. All these IRA’s have same rules as traditional IRA like if employer donates will get tax deductions on the invested income.
