Investing

The Basics of the Individual Retirement Account

The Individual Retirement Account (IRA) is a popular tool used by professionals to prepare for their retirement years. With the uncertainties surrounding employment, the fragility of the global economy, and the inadequacy of Social Security to address needs in one’s retirement years, it is only prudent that one sets aside a fraction of their income via an individual retirement account as a means to save for the future.

There are many types of individual retirement accounts each with its own terms of reference. Here is a basic description of the four most popular IRAs that are available to individuals when planning for their retirement years: 

  • Traditional IRA. The Traditional IRA Is the first IRA to be made available to individuals and remains to this day as one of the more attractive options for saving income for retirement. The Traditional IRA is an option for self-employed individuals or individual taxpayers and has a pre-set maximum amount for contribution per payment cycle. The best thing about Traditional IRAs is that these are tax deductible, depending on a few tax considerations, can very well create significant benefits in terms of the tax you pay while you are still working. 
  • Roth IRA. The Roth IRA works in pretty much the same way except that it is not tax deductible upon deposit. However, the tax break is deferred to the withdrawal period. This type of individual retirement account is advantageous for seniors looking to minimize their tax payments in their later years. 
  • SIMPLE IRA. The main difference with SIMPLE IRAs when compared to Roth and Traditional IRAs is that this is employer-provided, which is to say that deposits are setup with an employer share. The same rules for tax breaks apply as those with Traditional IRAs. 
  • SEP IRA. A SEP IRA is also employer-administered like the SIMPLE IRA with the crucial difference being that these is offered to small business owners in order to setup the individual retirement plan for their employees. 

The overall elegance of the individual retirement account system is that it allows individuals to plan for their future while at the same time taking control of their tax situation. In many fortunate cases, depending on the overall calculation, there are individuals who end up enjoying tax deductible savings while working and consequently, a lower tax bracket while in retirement. In essence, it is a system that encourages people to be more mindful of their future financial situation while they are still working and the tax incentives are meant to drive that point home.

 With an individual retirement account, anyone can find solace in having extra savings to augment Social Security and Medicare in their twilight years. And if you are the type of individual who wants to continue enjoying a comfortable level of lifestyle even after retirement, the IRA is certainly an idea that is well worth consideration. 

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