With the modern state of the American economy being anything but stable, saving for retirement comes highly recommended. An individual retirement account, or IRA for short, is a great way to open up your very own retirement account, without the need for an employer. Many people don’t understand how IRA works, so here’s some basic information to help you understand the concept of the most common IRA accounts, and how to get started with either a traditional, or self directed IRA account.
An IRA is simply an account used to shelter your retirement savings, in addition to helping you save each year on taxes. Traditional directed IRA accounts are super easy to open up — all that is required is taxable income, and the completion of some paperwork. You can open up a traditional IRA at most banks or investment firms. After you open up your account, with traditional IRAs, the investment options are typically limited by the bank or brokerage company that is overseeing your account. Traditional IRAs are the most common IRA types, with over 64% of IRA funds in the United States being invested in traditional IRA accounts. How IRA works in the traditional aspect, involves the money you put into a traditional IRA being deducted from your taxable income for that year, thus reducing your immediate tax liability. Your money will sit in the traditional IRA account, allowing it to grow without being taxed every year. With traditional IRAs, you won’t be taxed on the money you put in, until you withdraw it at retirement.
Self directed IRAs are a little more flexible, when it comes to picking an investment option. How IRA works with self directed IRAs, is through the funding from any type of investment you want — stocks, mutual funds, bonds, or real estate IRAs are common investment options. In fact, real estate investments are among the most popular self directed IRA investment options in the United States. Additionally, self directed IRAs allow for smarter, and more economical investing within categories such precious metals. Most standard IRA platforms don’t allow for IRA re-balancing; however, a self directed IRA allows for re-balancing with the amount of flexibility it provides.
As of 2013, the maximum contribution allowed with IRAs in the U.S. for individuals under the age of 50 is $5,500. Remember, this is your money in these accounts, and it’s important that you understand all the aspects and implications of your account. If you want to learn more about IRAs, visit the IRS website to obtain a copy of the IRS Publication 590. This publication will provide in-depth explanations of all the IRA rules and regulations; for example, if you need to calculate your life expectancy for distribution purposes, visit the IRS Publication 590 – Appendix C for instructions on how to do so. If you still find yourself confused on these IRA implications, or need assistance, contact your local IRA custodian or financial adviser.