The IRA or Individual Retirement Account has been a popular
savings tool throughout the past three decades, though investors are
often confused as to how the IRA works. Currently, there are
technically 11 different kinds of IRAs available but most investors are
only familiar with two, the traditional kind and the Roth IRA.
Each boasts their own advantages and disadvantages. It’s a good
idea for investors of all ages to take a close look at the rules and
regulations regarding each type to determine which will best fit your
needs.
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The Traditional IRA is most often defined as a regular IRA available to
those who are age 70 ½ and under who have earned income. Earnings
within this IRA are tax deferred until withdrawn. With a
traditional IRA, withdrawals MUST begin at age 70 ½ and will be
taxed. If the required distributions are not taken, a 50% penalty
will be assessed on the amount remaining. Contributions along the
way may or may not be tax deductible, depending on the individual’s tax
filing status and adjusted gross income.
Contributions to the more recently introduced Roth IRA are never
deductible; however, certain qualified withdrawals from the account
will not be taxable. That includes distributions made to a
beneficiary after a taxpayer’s death, withdrawals made when the IRA
owner reaches 59 ½, withdrawals made by a first-time homebuyer to
purchase a principal residence, and distributions to the taxpayer if
disabled.
As long as withdrawals or distributions are “qualified”, you’ll never
pay taxes on the earnings, nor will you be assessed an early withdrawal
penalty.
It’s necessary to carefully access what your retirement needs may be
when choosing the best kind of IRA for you. Consult the human
resources department at work, a qualified tax consultant, or a
financial planner if you find IRAs difficult to understand.
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By: Posted: Feb 17 2013 08:36:37 AM