An Overview of IRAs
With all the worry about retirement and Social Security, many are looking for alternative ways to prepare for those infamous “Golden Years”. Many people are finding that an IRA may be an ideal choice to help give them a little extra cash.
What is an IRA and How Does it Relate to Employee Benefits?
An IRA is an individual retirement account that allows you to have some money for retirement by depositing money into it every year. Unlike 401K plans, which are purchased by employers, IRAs are typically bought by individuals. However, the SEP IRA and the SIMPLE IRA are two retirement accounts that are employer-established. An individual IRA may be purchased from a mutual fund company, bank, financial planner or insurance company.
Who is an IRA For?
Although IRAs are for anyone who is interested in building up a retirement account, they’re most commonly used by individuals who do not have a retirement fund through their employer.
How Does an IRA work?
The IRA is a way to develop a nest egg for retirement. You’re allowed to deposit up to $5,000 per year into an IRA. If your employer doesn’t offer a separate retirement plan, like a 401K, you’ll be able to deduct the entire $5,000 on your income tax. However, if your employer doesn’t offer a retirement plan or they do and you still have an IRA, there are limits to what you may or may not be able to deduct. In an employer-based IRA, the employee and employer both make contributions.
Different Types of IRA Coverage in Existence
The two major types of individual retirement accounts are traditional and Roth IRA. The main difference between these two is that you cannot deduct the contributions you make to a Roth. Another difference is that you can withdraw money from a Roth when you’re 59 and not have to pay taxes. You also can withdraw early from a Roth without paying a penalty. The other two types are the SEP and SIMPLE.
Major Benefits of an IRA
The main benefit of an IRA is that it gives us the opportunity to save for retirement. However, an even greater benefit of an IRA is that you can deduct your contributions from your income tax, which will decrease your tax liability while you’re still building a savings account.