IRA LESSONWhat is an Individual Retirement Account An IRA provides you the ability to invest either tax free or tax deferred. There are many different types of accounts but the most common are the traditional and the Roth. The type of individual retirement account you choose depends largely on your investment goals. Traditional Individual Retirement Account The traditional individual retirement account allows you to invest tax deferred up to $4000 per year or $5,000 if you are over 50. The amount that you invest is deducted from your taxable income ultimately reducing your tax liability. When the money is withdrawn it is subject to normal taxes and a 10% penalty if withdrawn prior to age 59 1/2. The 10% penalty is waived if the money is used to purchase a house or for approved educational expenses, but you will have to pay normal taxes. The individual retirement account is a great investment tool and provides great flexibility for important expenses. I think the individual retirement account is a great tool for someone who doesn't have access to a 401K investment account. The Roth Individual Retirement Account Roth individual retirement accounts were created in 1997 primarily to help the middle class. The Roth is not tax deductible but the funds can be withdrawn without tax liability or penalty except for the interest earned. After five years all contributions including interest can be withdrawn without tax or penalty. You also get the same benefit for a home purchase and education as a traditional individual retirement account. If you are single you can invest as much as you like in a Roth account if your earnings don’t exceed $95,000 for the year. There are stricter limits on the amount you can contribute once you earn a $110,000 as a single filer. The limits for married couples filing jointly starts at $150,000 and gets stricter at $160,000 (see your tax preparer for complete details). If you qualify for a Roth individual retirement account it has some very attractive features such as the higher limits on deposits, the flexibility of withdrawals, and the fact that you don't have to pay tax on the money when you withdraw it. If you decide to roll your traditional individual retirement account into a Roth individual retirement account you need to make sure you are prepared to pay the tax on the rollover because it will be treated as if you withdrew the money from your traditional individual retirement account. This is a decision you have to make based on your personal situation, your needs and your tax status. To invest in a Roth IRA you must have earned income. You can use a Roth IRA even if you have a 401K or other retirement plan. Contributions must be made by the tax deadline each year. You have the flexibility to invest in whatever investment vehicle you choose. Amazon.Com IRA Books
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