An IR Account Guide
How are you going to make ends meet for housing and everything once you go into retirement? You probably haven't thought this far ahead yet, but your retirement will put an end to your regular paychecks. If your company belongs to the remaining few who offer retirement pension plans for their workers you are a very lucky individual indeed. Without company backed retirement pensions you have to look after our retirement income yourself.
Individual Retirement Accounts In A Nutshell
A good option for retirement saving are the so called Individual Retirement Accounts (IRA). The reason many people choose IR Account accounts are the offered tax benefits. With the help of tax benefits, IRA accounts are designed to encourage people to save money for their retirement by the US government. You are not allowed to do what you want with an IRA though. If you don't follow the rules you will face penalties and your tax benefit might be gone.
Exactly What Are The Good Aspects?
For one, returns on Individual Retirement Account investments are tax-deferred. The result of this is faster account growth since your returns are not taxed but reinvested instead. The money you invest works harder this way and the compounding effect is much stronger.
Then there is the thing that everything you contribute to the IR Account is actually deductible from your income. This is really awesome since you are allowed to keep the money and save it for later but from a tax perspective it is treated as if you had spent it on tax deductible spendings. This doesn't work for all taxpayer and Individual Retirement Account type combinations though. Roth IRA's work differently from traditional IRA's for example.
All this also goes for the case of an inherited IRA.
IR Account Drawbacks
You only heard about the positives so far so don't get all giddy too soon. In life, nothing has only upsides. Win-win might be a popular term but that is only achieved by making some trade-offs.
As stated earlier, the single purpose of IR Accounts is saving for retirement. In order to prevent abuse of the system, there are some rules that are designed to prevent exactly this. For example, you are not allowed to remove money from an Individual Retirement Account below a certain age. A ten percent penalty on the withdrawn amount is subtracted if you try to remove money from the account before you reach this age. If you have the wrong type of Individual Retirement Account you might even need to pay income tax on the amount of money you removed prematurely.
And then there are rules that regulate how much money you are allowed to actually save in an IR Account. Without such rules in place, the IRS would face huge problems with lost tax revenue. After all, if you had the ability to completely avoid paying income taxes, you would be stupid not to make use of that facility. That's why you are allowed to only save a limited amount of your annual income in an IR Account. As these limits are changed anually, you'd better get up to date information yourself from the Internal Revenue Service website. The most current information is freely available for inspection there.