IRAs are Individual Retirement Accounts that anyone who is employed can set up to help save for retirement. The amount in an IRA is not taxed until the money is withdrawn or paid out of the account. 401k plans are another option available for retirement planning.
How It Works
If you are employed, you can go to a bank, brokerage, an insurance company, or even a mutual fund to set up an IRA. The law dictates the maximum amount of tax-deferred money you can contribute to an IRA every year. In some cases if you are not covered by any type of employee-offered retirement plan at work, the contribution you make to your IRA might be tax deductible.
There are a many types of IRAs like Precious Metals IRA, Roth IRA, Traditional IRA, SEP IRA, SIMPLE IRA, and Self-Directed IRA. These are special IRAs designed to make retirement more affordable for middle-class people. You can withdraw the money in your IRA without paying any tax if you have had the IRA for a considerable amount of time, usually 5 years or more, and your age must not be below 59½ at the time of withdrawal. Otherwise the amount you withdraw is taxable and you also have to pay a penalty of up to 10%.
The benefit of IRAs is the ability to invest your money into a retirement account without being taxed; your earnings are tax deferred. When you're ready to withdraw the money from your IRA in your retirement, you will be taxed at your income tax rate. For those who leave the money in the account until they reach the specified age, it is an excellent way to help fund the costs of retirement without having to pay any tax penalties. Unlike 401k plans, IRAs are planned by the individual and the person will be the sole contributor.
Few banks or mutual funds will charge you to open IRAs. IRAs can be funded only with cash or cash equivalents. The fees associated with maintaining IRAs vary by institution, but you should be able to open the account without an initial payment and the contributions will come straight from your earnings.
The sooner you open an IRA, the more time you have to contribute and let that money earn interest so you have more money available when you reach 59 ½ years. Even if you are nearing your retirement age, the money will probably be held in the account for at least 5 years.
Almost all banks, mutual funds or brokerages will offer IRAs. The bank where you already have an account may offer a variety of IRAs and other retirement funding accounts.