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Different Types of
IRAs
With all the three letter names
floating around our society what is one
more? Really? It's not like we don't
have enough to worry about without
adding this burden. However, when it
comes to real life, these three letters
will have a greater noticeable affect on
people than many of the other three
letter names that we here on a regular
basis such as the CIA, FBI, NSB, ATF,
and countless other abbreviations that
are hidden behind three little letters.
The good news is that an IRA isn't
nearly as insidious as its name would
imply. This is a useful tool to most
Americans who hope to someday retire
from their life of work and life out a
somewhat comfortable existence.
There are actually many different IRAs,
which is the abbreviation for individual
retirement account.
A Traditional IRA is the most common.
The only requirement for this particular
IRA is that you are employed and that
you invest no more than 100% of your
income or $4,000 per year, whichever is
greater up to the age of 49. At the age
of 50 your maximum investment is 100% of
your income or $5,000 whichever happens
to be greater. If you meet the
requirements of the IRS to their
satisfaction your contributions to your
traditional IRA will be tax deductible.
As a result, the funds are not taxed
while in your IRA account but once the
funds are withdrawn they are subject to
federal income taxes.
This is not necessarily a bad thing,
particularly for those who plan to be in
a lower tax bracket when the funds are
withdrawn. However, there is a growing
number of people who are interested in
the benefits that Roth IRAs and similar
funds present by paying the taxes now
when the rates are known rather than
risk an even higher rate of taxation in
the future, even in a lower tax bracket.
The best advice I can give is to discuss
the matter thoroughly with your
financial planner and listen to their
advice.
This is a case where only you can
ultimately decide which decision is best
for your needs but he or she can provide
valuable guidance. You should also keep
in mind that though laws favor
non-taxation for Roth contributions that
could change between now and the time
you are ready to withdraw your funds,
which will have you paying double taxes
on those funds and is the primary reason
that many people elect to stick with
Traditional IRAs instead.
There are several distinct disadvantages
to the traditional IRA funds. One of
those would be the requirements in order
to qualify for tax deductions. First of
all, if you have the opportunity to
invest in another retirement option
through your employer you must be below
a certain income level in order to
qualify for the tax deduction. If you do
not meet that qualification all the
funds that are deposited into your IRA
fund are subject to federal income tax.
You will need to seriously discuss your
stock buying strategies before
determining if this is the best choice
for you as those who buy and hold tend
to be penalized when it comes to capital
gains.
As things are currently, a Roth IRA is
often preferable as the money isn't
immediately tax deductible but not only
is the investment not taxed upon
withdrawal but neither are the gains
that were earned on the investment.
Another serious setback when it comes to
the traditional IRA is that you are
required to begin receiving payments at
age 70.5. As we are seeing more and more
people work well beyond the traditional
retirement age this is becoming more and
more of an issue.
There are advantages and disadvantages
to traditional IRAs. It is important
that you decide which of these you are
prepared to live with and which you
would rather live without. These
differences will matter a great deal
when retirement comes. Take the time to
discuss your goals for the future with
your financial advisor and see what he
or she recommends.
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