What Is An IRA

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Understanding IRAs: A Guide


Introduction

Saving early for retirement is crucial, and enhancing your savings can be achieved with an Individual Retirement Account (IRA), even if you already have a 401(k) at work.

What is an IRA?

An IRA is a retirement savings account that offers the benefits of compound interest and tax advantages. Available to anyone with taxable income, IRAs can be opened at most financial institutions, usually with lower fees than other investment accounts.

Types of IRAs

Choosing the right type of IRA can be confusing, but understanding the differences can help.

Traditional IRA

- Taxation: Earnings are taxed upon withdrawal.
- Penalties: Withdrawing money before age 59½ incurs penalties.
- Mandatory Withdrawals: Required to start withdrawals at age 70½.
- Income Restrictions: None.
- Contribution Deductions: May be tax-deductible, depending on income and employer retirement plan eligibility.

Roth IRA

- Taxation: Earnings can be withdrawn tax-free after age 59½, provided the account is at least five years old.
- Mandatory Withdrawals: No age requirement for withdrawals.
- Income Restrictions: Single filers earning $110,000 or more and couples with joint income of $160,000 or more cannot open a Roth.
- Contribution Deductions: Contributions are not tax-deductible, but earnings are tax-free for qualified distributions.

Contributions and Limits

The federal government sets IRA contribution limits annually. Maximizing your contributions is advisable, as limits have increased since 2002, making now a great time to open an IRA.

By understanding these key differences and benefits, you can make an informed decision to bolster your retirement savings.

You can find the original non-AI version of this article here: What Is An IRA .

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