What Does IRA Stand For ?
IRA stands for Individual Retirement Account. It is a type of account that allows a person to make either tax deferred or tax free contributions so that he can save for his retirement. There are many different types of IRAs, and person should select a type based on what his financial situation is and what his goals are financially. |
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The two most common types of IRAs are the traditional IRA and the Roth IRA. In the traditional IRA, a person can make a contribution of up to $5,000 a year if he is less than 50 years of age, and $6,000 if he is 50 years or above. This contribution is tax deductible and paid with pre-tax dollars. Therefore, the overall taxable income reduces.
The normal age for distribution for traditional IRA is 70.5 years but you can start as early as 59.5 years. However, if you withdraw money before 59.5 years, you will have to pay a 10 percent early withdrawal penalty. In addition, the withdrawn amount will be subject to federal tax. If you withdraw when you become eligible, then you will have to pay the tax rate prevailing at the time of withdrawal.
The Roth IRA was created in 1997 to help the middle income bracket. This IRA is not tax deductible as the funding is done with after tax dollars. There is no mandatory age for withdrawal and a person can withdraw his contribution whenever he wants to. However, the interest cannot be withdrawn for the first five years after setting up the account. Thereafter, if any withdrawal is made, no penalty or taxes are levied. The Roth IRA gives you total control over your funds and you can decide in which investment vehicle to invest your money.
In order to qualify for a Roth IRA, a person must belong to a certain income bracket, which is $95,000 for an individual and $150,000 for married couples.
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