An IRA, or Individual Retirement Account, is an investment account purchased directly from a financial institution, not through your employer.
There are two basic types of IRAs: traditional and Roth. Which one is right for you will depend upon your financial goals.
A Traditional IRA allows you to contribute on a pre-tax basis, meaning that your contributions are not taxed before they’re placed into your account. Instead, taxes are applied when you make withdrawals, an ideal arrangement if you believe your tax bracket will be lower when you retire than it is now. Contributing on a pre-tax basis also allows you to reduce your taxable income now and thus, pay less to Uncle Sam. One important note: you must begin making mandatory withdrawals from a traditional IRA at age 70 1/2 – by April 15 following the year you reach 70 ½.
A Roth IRA works just the opposite. You pay taxes on the money now but no taxes will be due when you begin making withdrawals. This option is great if you’d rather pay the taxes now and not have to worry about them later, when you’re on a fixed income. And unlike the traditional IRA, you are not required to begin withdrawals at age 70 ½ if you don’t want to.
So, which one is right for you?
Obviously, both types offer significant advantages – choosing the right one for you will depend upon your individual needs. Consulting with a professional financial planner can help you choose the right IRA for you.
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