An Individual Retirement Account (IRA) is a tax advantage account which aims to help people save money for retirement. Many tips can be utilized to get the most out of these savings vehicles. They are as follows:
- Knowing The Difference Between Traditional And Roth
- Advantages Of IRA's
- Disadvantages Of IRA's
- Understand Account Minimums And Maximums
- Minimize Fees
Knowing The Difference Between Traditional And Roth
The main difference between Traditional and Roth IRA's is when the tax is paid. With a traditional IRA, money is put into the account pre-tax. The fee is then paid on the money once you withdrawal it from the account in retirement. A Roth IRA works the opposite way. You place post-tax earnings into the account now so that you do not have to pay taxes on withdrawals in retirement. A financial adviser can help you decide which is the best for you.
Advantages Of IRA's
The most significant advantage of IRA is tax deferment or hedging. A traditional IRA defers taxes until retirement and allows you to deduct what is put into it from your current taxable income each year. Alternatively, by paying taxes now in a Roth IRA you hedge against possible higher taxes in the future.
Disadvantages Of IRA's
The main disadvantage of an IRA is that you cannot make withdrawals on your money until you're either 59 and a half or need to access the capital for medical reasons. That is not to say early withdrawals are entirely taxed with a penalty. Only earnings incur a penalty while the principal can be taken out penalty free.
Understand Account Minimums And Maximums
The maximum that you are allowed to contribute to an IRA is $5,500 per year. A less known fact is that some IRA's require a minimum investment of as much as $1,000 even to open up an account. Be sure to research thoroughly before attempting to open an IRA of your own.
Fees can be the death of any investment. Before placing your hard earned cash in an IRA, be sure to review the expenses that you will incur first. Compare the rates of a variety of financial institutions to ensure that the least amount possible will be taken out of your investments. If fees are too high, you will never see a significant return on investment regardless of growth in your account.
If you would like to dive more into the details of IRA's, the best tax blogs will be able to go into far greater specifics. It's never too early to begin planning for your financial future, and IRA's are one of the most significant first steps to take.