Individual Retirement Account (IRA) is a way to save for retirement. Both Traditional and Roth IRAs offer tax incentives to help save money.
IRAs can help you plan for retirement and for higher education expenses for your dependents. The benefits associated with IRAs are amazing and should make you feel like you "need" an IRA rather than just "want" one. If you can afford to invest money, you will benefit from the tax savings and compound interest earnings of IRAs. Some differences between an IRA and a regular savings account are:
- An IRA allows you to contribute money into an account that holds earnings, tax-deferred, until you choose to withdraw your money. When you withdraw money from the IRA, you will have to pay taxes based on the tax bracket you are in at the time of withdrawal. In most cases, when you retire and you are over the age of 59 1/2, you will be in a lower tax bracket than when you are working. With a regular savings account, interest earnings are not tax-free.
- When contributing funds to an IRA, you can invest in a multitude of investments. With these investments, an IRA will fluctuate with the various markets and interest rates. Some examples of IRA investments are: stocks, bonds, mutual funds, certificates of deposit (CDs), and money market deposit accounts. Generally, based on the historical performance of the stock market, returns of investment vehicles such as mutual funds have out-performed returns of savings accounts.
- Regular savings accounts can usually be withdrawn from any time. With IRAs, withdrawals are limited.
- IRAs have a set limit of contributions that can be made each year. With a regular savings account, you are able to contribute as much as you can afford each year.
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