Types of individual retirement accounts (IRAs)

Everyone works to secure the financial future, especially for the old age. Who wants to depend alone on employer-based pension and Social Security benefits? For financial security after retirement, many people opt for individual retirement accounts or IRAs.

The advantage of individual retirement accounts is that employees have the option to choose from many banks available and the types of assets they want to invest in. Investors can set up their own individual retirement accounts in financial institutions like a bank and then invest in it. The investment is divided among several types of assets like mutual fund investments, bonds etc.

It should ideally be a mix of both high-risk and low-risk funds so that the contribution is growth-oriented and at the same time all funds are not lost if the market crashes. A person should conduct extensive research regarding the investment situations in the market before taking the decision to invest in a low risk-low gain type or elevated risk–high gain type of assets.

The two basic categories of individual retirement accounts are as follows:

  • Traditional individual retirement account: The investments to the traditional individual retirement accounts are taxable, however, the earnings from the account are not. The contribution to this type of account lowers the AGI or the adjusted gross income and so it is advantageous from the tax-saving point of view. There is an age limit of 70 and a half years for investment and it is mandatory to start withdrawals from that point of time.
  • Roth individual retirement account: Investments and the earnings are tax-free in this type of account. However, there is a certain limitation based on the salary of the investor who is contributing to such an account. Every year this amount is revised and changed. Also, there is no age limit for the contribution to such an account. The amount of withdrawal from this account is not deductible after the age of 59 and a half years.

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