Definition – IRA
An IRA (individual retirement account or individual retirement arrangement) is a tax-favored savings account designed to help individuals save and grow funds for their retirement.
IRA stands for Individual Retirement Account. Such account is provided by different financial institutions in the US. It is a type of custodial account that is set up for the benefit of taxpayers.
Saving in such IRA lead to tax benefits. The amount invested in IRA’s reduces your taxable income and hence help you save tax.
For example, your income after the deductions is $ 50,000 for a particular tax assessment year.
If you have invested $ 3000 in such Individual Retirement Accounts, then your taxable amount will be $ 47,000 instead of $ 50,000.
In addition to the above, you can plan your retirement early with such accounts.
The annual contribution limit to all of your traditional and Roth IRAs cannot be more than $5,500.
$6,500 is allowed only if your age is 50 or above.
To know more about the limits of contribution for different IRAs by IRS, click on the link below:
Additional Benefits of an IRA’s
Apart from savings in income taxes, there are many other benefits of saving in Individual Retirement Accounts.
- The growth of the investments is tax-deferred. In simple terms, you pay nothing on gains upon the investments until as the money remains in the IRAs.
- The contribution limit of $ 5,500 is on top of the contribution made in 401(k).
- Withdrawals from IRAs aren’t good before retirement, the IRS has a provision which allows individuals to withdraw money before the age of 59 ½ to pay for certain expenses. The conditions are mentioned on IRS website.
Types of IRAs
There are many different kinds of IRAs:
- Traditional IRAs
- Roth IRAs
- SEP IRAs and
- SIMPLE IRAs.
Each one of the above has different eligibility criteria. The criteria are based on your income, employment status etc.
The contribution limits, as well as the withdrawal limits, differ in each case. Hence, everyone cannot take advantage of all of them.
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