What Is An Individual Retirement Account (IRA)?

One of the reasons investors put their money on the market is to create a retirement corpus. Everyone wants to save up for retirement, which is a time when you’ll have little to no income. Such a circumstance demands that you have enough money saved up to last the rest of natural life, and all the needs of your family as well. There are various ways to save up for your retirement, and even to beat the ever-looming inflation. One of the ways to do that is to have an Individual Retirement Account. Plus, it saves you tax money!

What exactly is an Individual Retirement Account?

An IRA is a special savings account where you can put your money for creating your very own retirement corpus. IRA has many benefits, but the main advantage is that it lets you save on tax money. The returns on investment from IRA are non-taxable, at least till you choose to withdraw your money.

IRA is for creating your own retirement corpus, but it does not allow you to take out money from the account till you have reached 60 years of age. Well, you can withdraw money earlier if you really need it, but there is a penalty to be paid for that.

There are different types of Individual Retirement Accounts. All these three have their own eligibility criteria and tax implications.

Traditional IRA

This lets you deduct the amount you invest from your tax returns. Each time you invest in a Traditional IRA, you pay less income tax. This also means that you’ll be able to increase your investments since you don’t need to keep paying tax on how much you earn from it. However, the benefit ends when you withdraw the money at retirement.

Roth IRA

This allows you to invest after the deduction of tax, and to get tax-free returns till the age you retire. Unlike the Traditional IRA though, you won’t be able to get tax deductions at the time of making your investment in Roth IRA. However, the benefit here is that you don’t need to pay taxes when withdrawing.

Simple IRA

This is ideal for the self-employed or for those with a small business. The tax rules are the same. Simple IRA lets small business owners save for building a retirement corpus for themselves and for their employees. 

To conclude

IRA is very useful if you are serious towards building up your own retirement corpus. There are many strategies/products/plans to choose from. They all help you to save tax money and give you higher returns.