Use an Individual Retirement Account to Save for the Future

by FinancialTips4U

Saving for retirement doesn't have to be stressful or complicated. An individual retirement account (IRA) is a simple solution.

Saving for retirement doesn't have to be stressful or complicated. An individual retirement account (IRA) is a simple solution that allows you to earn interest on your savings and tax benefits on your contributions or withdrawals. While your budget might be looking tight already, saving now can make all the difference in the future. Whether you have extra money each month or you're struggling to minimize your expenses, an IRA could be the right investment choice for you.

Restrictions and Limitations

Before you open an IRA account, you should be aware of the terms and limitations you might encounter. Generally, you cannot contribute more than 5,000 dollars per year. Some IRAs allow you to contribute more after you reach the age of 50, but you should still plan on the limitation to ensure that you're saving enough. Once you turn 59 1/2, you can begin withdrawing money from your IRA without penalty. You won't be penalized for leaving the money in the IRA until age 70 1/2. At this point, many IRAs require you to begin taking distributions.

Understanding Your Tax Benefits

IRAs are a popular investment choice because they allow investors to receive tax benefits through the simple act of putting money away for the future. With most IRAs, you'll receive the tax benefits upfront in the form of a reduction in your taxable income. Roth IRAs, however, provide you with tax benefits during retirement. You'll continue to pay taxes in full throughout the contribution period so that you can receive tax-free withdrawals after you've retired.

Determining Your Investment Strategy

With great interest rates and tax benefits, IRAs fulfill the financial needs of many investors. However, many people prefer to use their IRAs in conjunction with other accounts because of the limitations placed on IRAs. For example, an investor with a Discover Bank individual retirement account might be interested in saving more than 5,000 dollars per year for retirement. He or she will receive maximum benefits by investing the first 5,000 dollars into an IRA and putting the additional funds into another available investment account. Savings accounts, certificates of deposit and money market accounts boast high interest rates and favorable account terms for investors.

Finding the Right IRA

Once you're ready to open an IRA, you'll need to choose a specific type of investment account. Traditional IRAs and Roth IRAs are the two most common types. If you plan to reach a higher tax bracket during your retirement, you might prefer the Roth IRA's deferred tax benefits. Other investors prefer the traditional IRA's instantaneous tax benefits and overall savings.

Self-employed investors and small business owners can consider the Savings Incentive Match Plan for Employees (SIMPLE) IRA and the Simplified Employee Pension (SEP) IRA. Small business owners can fund these accounts for employees instead of offering pensions, and self-employed individuals can use the accounts to save for retirement. The SIMPLE and SEP IRAs work similarly to traditional IRAs, as investors receive deductions in taxable income for all contributions.

Roth IRAs Facts

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Planning for Your Future Retirement

Custom Bio:

N. Farley is a freelance writer with a wide range of publications to her credit. She specializes in articles on finance, search engine optimization and Internet marketing. Nicole has a background in management, journalism and English literature and has been writing full-time since 2010.

Updated: 01/02/2012, FinancialTips4U
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