An Individual Retirement Account (IRA) is a method of saving aimed at providing retirees with considerable financial compensation at the time of retirement. The individuals themselves usually start these accounts before retirement and depending on several different factors such as employment status, income, and years for retirement, there are limitations on how much an individual can contribute to the IRA. The usefulness of saving in an IRA account is the potential for having a considerable tax break which is not available to the savings made in a usual bank account.
In order to cater to different individuals’ various financial abilities, federal government has introduced several varieties of IRAs and among them, traditional IRAs and Roth IRAs are the commonest. Traditional IRAs are also known as regular IRAs and it differs from a Roth IRA in that the income tax payable for the money deposited in a regular IRA should be paid at the back end, which means at the time of withdrawing the money from the account. Thus, a person starting a regular IRA could escape taxes on the front end and shall also enjoy tax free growth in their money each year as long as the money and the interest remains within the IRA.
While regular and Roth IRAs differ in several key aspects, the ability to contribute to the IRA independent of one’s income and the necessity to withdraw the money in the account by the age of 70½ are some of the major characteristics of a regular IRA when compared against a Roth IRA.
When it comes to the amount of money one shall put into an IRA account, the expert advice is as much as possible. The reason being that the more one saves in an IRA, the more tax benefits he or she stands to gain. For the year 2012, the government limitation for saving on both regular and Roth IRAs is $5,000 per year or the amount of total taxable compensation received by a person within the year, whichever is smaller. However, in the event a person reaching 50 years or is older than 50 years during a particular year, he or she can save an additional $1,000 for the year concerned. Thus, the IRA encourages those who are reaching retirement age to save more money than their younger counterparts are.
Although the limitations to save on a regular IRA are as depicted earlier, it is not always possible to save the maximum allowed due to various reasons. Thus, a person wanting to invest in a retirement account should do some math to determine how much money he or she wants to save by the time of retirement in order to live the desired lifestyle after retirement. In order to do this, one should take into account the present savings, the income, additional social security benefits gained by the person at the time of retirement and the age on which the person expects to retire. Depending on these factors, it should be possible for a person to determine the exact amount of money that he or she needs to save in order to gain the desired return from an IRA account.
Therefore, investing in an IRA is an exceptional method of saving for retirement although the amount to save should be determined carefully as too much, or inadequate savings could adversely affect the present lifestyle or the expected lifestyle after retirement respectively.