What are IRAs?

With all the three letter names floating around our society what is one more? Really? It is not like we do not have enough to worry about without adding this burden. However, when it comes to real life, these three letters will have a greater noticeable effect on people than many of the other three letter names that we here on a regular basis such as the CIA, FBI, NSB, ATF, and countless other abbreviations that are hidden behind three little letters. The good news is that an IRA is not nearly as insidious as its name would imply. This is a useful tool to most Americans who hope to someday retire from their life of work and life out a somewhat comfortable existence.

 

There are many different IRAs, which is the abbreviation for individual retirement account.

 

A Traditional IRA is the most common. The only requirement for this IRA is that the client is employed and that they invest no more than 100% of their income or $6,000 per year, whichever is greater up to the age of 49. At the age of 50 their maximum investment is 100% of their income or $7,000 whichever happens to be greater. If they meet the requirements of the IRS to their satisfaction their contributions to their traditional IRA will be tax deductible. As a result, the funds are not taxed while in their IRA account but once the funds are withdrawn, they are subject to federal income taxes.

 

This is not necessarily a bad thing, particularly for those who plan to be in a lower tax bracket when the funds are withdrawn. However, there is a growing number of people who are interested in the benefits that Roth IRAs and similar funds present by paying the taxes now when the rates are known rather than risk an even higher rate of taxation in the future, even in a lower tax bracket. The best advice I can give is to discuss the matter thoroughly with their tax advisor and listen to their advice.

 

This is a case where only they can ultimately decide which decision is best for their needs but he or she can provide valuable guidance. They should also keep in mind that though laws favor non-taxation for Roth contributions that could change between now and the time they are ready to withdraw their funds, which will have them paying double taxes on those funds and is the primary reason that many people elect to stick with Traditional IRAs instead.

 

There are several distinct disadvantages to the traditional IRA funds. One of those would be the requirements to qualify for tax deductions. First, if they can invest in another retirement option through their employer, they must be below a certain income level to qualify for the tax deduction. If they do not meet that qualification all the funds that are deposited into their IRA fund are subject to federal income tax. They will need to seriously discuss their stock buying strategies before determining if this is the best choice for them as those who buy, and hold tend to be penalized when it comes to capital gains.

 

As things are currently, a Roth IRA is often preferable as the money is not immediately tax deductible but not only is the investment not taxed upon withdrawal, but neither are the gains that were earned on the investment. Another serious setback when it comes to the traditional IRA is that they are required to begin receiving payments at age 70.5. As we are seeing more and more people work well beyond the traditional retirement age this is becoming more and more of an issue.

 

There are advantages and disadvantages to traditional IRAs. It is important that they decide which of these they are prepared to live with and which they would rather live without. These differences will matter a great deal when retirement comes. Take the time to discuss their goals for the future with them and go with what is best to meet their needs.

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