What Is An Individual Retirement Account

Article Written By: RebbecaMyers

Individual retirement account is usually set up by individuals to provide income when they retire from work. This is in addition to any other types of pensions or social security. It has two main benefits.

First, it provides money for retirement. Second, it can be a good way to save on taxes. A traditional IRA allows someone to contribute money to their account and not pay taxes on it. For the 2011 tax year that amount is limited to five thousand dollars. However, this amount changes over the years, so it is important to check for the current limitations.

If you are filing a joint return, you and your spouse can each contribute the maximum amount to your IRA. For 2011 that totals ten thousand dollars. However, if you are older, you can contribute more. When you retire and begin to receive your money, you must pay Federal income tax on the payments.

When it comes to Individual Retirement Accounts there are a number of products to pick from. You've Keogh plans, Simple plans, SEP plans, all of which have their specific requirements and benefits.

For the 2011 tax year, taxpayers over the age of 50 may contribute an extra one thousand dollars, and take the money off their taxes. This law provides older Americans to catch up on their contributions. This is important if someone starts working later in life, or simply does not have a lot of income for retirement.

The traditional IRA provides benefits to taxpayers, but there is another type of IRA that may be worth looking into. That IRA is known as the Roth IRA, and it is different than the standard IRA. A Roth has some of the same benefits and limitation of the traditional IRS, except a Roth IRA can provide tax free income when you retire.

When you contribute money to a Roth IRA, it is subject to Federal income tax. However, that is the last time that you pay taxes on the money. This may not seem like much, but it is important to look at the Roth a little closer.

If you invest in a Roth IRA and pay in for many years, you can have a substantial amount of earned interest. Over twenty or thirty years, it can be well in excess of six figures. Not only do you owe no taxes on your contributions when you retire, but you owe nothing on the accrued interest. All of the money that you receive is completely tax free. So the main decision is pay taxes now or pay them later. If you can afford to pay taxes now, it will provide some big dividends in the future.

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A more comprehensive look at what is an Individual Retirement Account and Keogh plans can be found at the finance site.

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This Article Has Been Published on Thu, 6 Oct 2011 and Read 56 Times

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