There is a growing awareness among
the population of the need for retirement savings. It
has become painfully obvious that social security alone
does not provide an adequate level of funds to maintain
a comfortable lifestyle. People have begun to rely on
their own savings to ensure a financially sound future.
One type of savings plan that has gained increasing
popularity in recent years is the Individual Retirement
Account, also known as an IRA.
IRAs are personal plans that are
not set up through an employer like a 401K. Often times
they are used in addition to a 401K to supplement the
savings. Many people choose to fund their company
sponsored plan up to the maximum amount that the
employer will match. Any additional investments are then
placed into an IRA. The reason for this is that the
investment choices are much broader when using an
individual retirement account. Individuals are not
restricted by a limited number of
choices.
2 Types of IRAs
- Traditional IRAs. A savings plan through which
individuals place money into investment funds. The
money is not taxed until it is withdrawn at
retirement. This has the affect of lowering a person's
current taxable income. It also creates a potential
benefit if a person's tax bracket will be lower at the
time the money is withdrawn. In this case less money
would be paid in taxes. It is important to keep in
mind that any money that is accessed prior to age 59 ½
is subject to a 10% penalty.
- Roth IRAs. These retirement
accounts are relatively new, having been started in
1998. There are two main differences in this plan
versus a traditional IRA. First, the invested dollars
are taxed up front, which allows the money to be
withdrawn tax free. Since retirees generally
have a lower income, many people find the tax free
advantage beneficial at this time. The second
advantage is that money can be withdrawn at any time
without penalty. This means that technically you would
not have to wait until retirement before taking the
money, although early withdrawals could damage your
savings goals.
An individual is allowed to invest a
total of $3,000 annually into an IRA account of their
choosing. People over 50 have the option of investing a
total o $3,500. These levels are higher than were
originally allowed, and there is a very good chance that
they will be raised again in the future.
IRA's are a
great way for an individual to contribute to his
retirement savings. They are often used as a stand alone
product but they are also very affective when combined
with other forms of
savings.
