What Is An IRA Retirement Account

Article Written By: RebbecaMyers

Many people have heard of an IRA but they do not know what it is or how it works. It stands for Individual Retirement Account. It is basically just a savings account that has tax breaks, which makes it a good way to put money away for retirement. Many people think it is an investment in itself, but it is not; it is basically the place where you keep your investments and assets. The most common accounts are the kind that people open on their own, instead of ones provided by a company.

There are different types, including Traditional IRAs, Roth IRAs, SEP IRAs and Simple IRAs. Which kind you get is completely up to it will more than likely depend on your financial situation. Each different type has different eligibility criteria, which means that not everyone will be eligible to get it. Eligibility is based on income level and employment status. They each had different caps on the amount you are allowed to contribute annually and they have penalties for withdrawing money before your set retirement age.

The traditional IRA is the easiest to achieve and almost anyone can contribute to one, as long as either you or your spouse receive taxable income and are under the age of 70 and a half. Contributions to this are only tax deductible under certain conditions.

Roth IRAs are not tax deductible and in order to contribute to one of these you must have a modified adjusted gross income of $167,000 or less if married and filing jointly and $105,000 or less if you are single or filing separately. If you make more than these limits you might be allowed to make partial contributions.

SEP and Simple IRA accounts are set up for people that are self-employed or own a small business. The Simple require the business to have fewer than 100 employees that earn at least $5,000 a piece, however any business owner can open a SEP.

Once they have opened one, their main question is how much money to contribute. You generally want to put as much money in as the government allows. The more you put in, the more money you have that is protected from taxation. If you are under 50 years of age, you are limited to $5,000 per year, or the total of taxable compensation, whichever is smallest. For those over 50 then you can contribute $6,000.

It is a good idea to open an IRA because the income generated from dividends, capital, and interest compounds annually and is not taxable. Many people are also concerned about when they will be able to use their money. If you are under 59 and a half it will cost you; the cost is usually 10% of whatever you withdraw, and you will have to pay income tax on the withdrawal. If you are over 59 and a half you will not have a penalty payment but the money will be taxed.

There are exceptions to every rule and ways you can get around the withdrawal penalties. You do not have to pay a penalty if you are using the withdrawal to pay for college expenses for yourself, your spouse, children, or grandchildren, if you are paying for medical expenses that are more than 7% of your income, the costs of a new disability, or a first time home purchase.

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