The benefits of Individual Retirement Accounts

The Benefits of Individual Retirement Accounts (IRA) The most common and easily available investment option is the Individual retirement account. They are classified into three key subdivisions namely Traditional IRA's, Non-deductible traditional IRA's and Roth IRA. While the above sounds fantastic and great, the answer to the fundamental question still continues to elude many, "Which are the best IRA accounts for me?"

These accounts are typically restriction based savings accounts. It's advantage that you do not pay your taxes on the earnings and the growth of your savings until you remove the money. If you withdraw the money before you turn 59.5 years old, there are stiff penalties. Various IRA accounts exist each with their own tax and eligibility requirements.  Traditional IRA's In this account, there is a tax deduction for the savings you set aside here. Ultimately, you are not paying tax on the income you have set aside. Here you will not have to include capital gains, interest and dividends from the IRA in your annual income. When you withdraw the money, it is taxed as ordinary income. If you withdraw before turning 59.5 years, there is an additional 10% tax imposed.

You must start withdrawing when you turn 70.5 years old.  Non-deductible traditional IRA's This is a traditional IRA with the contributions being non-tax deductible. Savings are tax deferred. Part of the income will be a tax-free return of the original non-deductible contribution, and the rest will be taxed. The difference between a non-deductible IRA and a traditional IRA is the tax imposed on the original contribution.  Roth IRA's A Roth IRA is a potential tax-free savings and distributions account. Unlike a traditional IRA, there are no deductions on contributions. The contribution grows within the IRA without having to pay any taxes on the growth. Roth IRA has some income restrictions.

The total contribution to traditional IRA or Roth IRA is limited to a maximum contribution of $5,500.00. If the account holder is over 50 years old, then he can contribute an additional $1,000.00.  Summarization: In a traditional IRA, required minimum distributions should be withdrawn when the account holder turns 70.5 years old. Else, a 50% penalty shall be imposed on the amount that should have been withdrawn. These required minimum distributions are taxable.

In a Roth IRA, none of your contributions is taxable; hence, withdrawals from the amount contributed are always tax-free. Keeping in mind the above, account holders are urged to invest in the IRA specifically suited to their retirement plan.