Individual Retirement Account (IRA)

If you want to put money aside so you have income after you stop working, an individual retirement account, or IRA, may be just the tool you need. The federal government calls the IRA a “no fuss, no muss” situation, but it can be complicated if you’re not sure where to begin. We here at PaydayLoansCashAdvance have gathered helpful information about IRAs so you can start saving and stop worrying about what the future may bring.

Individual Retirement Account Explained
IRAs are arrangements where you set aside a certain amount of money at regular intervals to be used later, after you retire. You can do this on your own with or without a job or you may be able to ask your employer for help. The amount waiting for you after retirement depends on several factors. These include the amount and frequency of each deposit, your age when you start adding deposits, and the amount of money your deposits earn once they are in the account.

Various Types of IRA-based Plans
Not all IRAs are created equal, as evidenced by the various types of IRA-based plans in which you can invest. The first two, the traditional and Roth IRA, involve taking deduction from your regular paycheck. Plans typically have a set minimum and maximum amount you can contribute, but the exact amount that comes out each check is usually up to you. You can generally set up either type of account at banks, brokerages, credit unions and other financial institutions where you do business.

Traditional IRA: The traditional individual retirement account takes money from your paycheck while you can generally take a tax deduction for contributing that money to the plan. You only pay taxes on the money once you withdraw it from the account. The traditional type of account gives you incentive to contribute by offering a tax edge now.

Roth IRA: The Roth version of the IRA does the opposite with your taxes. You don’t get the advantage of having your contributions be tax deductible and you may have to pay taxes on the funds as earned income, you do not have to pay taxes on the distributions once you start to withdraw the funds after retirement. Here you get incentive to contribute by offering a tax edge down the road.

SEP: SEP stands for Simplified Employee Pension plan and a SEP-IRA lets employers contribute part of the funds that goes into each employee’s individual account. Employers may go for a SEP-IRA over more complex pension plans due to the simplified nature of the plan and, therefore, the reduced administrative costs it takes to run the plan for their employees.

Like the traditional and Roth plans, funds for the SEP come out of your regular paycheck. Unlike the traditional and Roth plans, this plan involves employer contributions and must be set up by the company for which you work.

SIMPLE IRA: The SIMPLE acronym stands for Savings Incentive Match Plan for Employees. As the name suggests, it gives you incentive for contributing money by allowing your employer to match your contributions with its own. If you decide to deduct $100 from each paycheck, for example, you employer may match a set portion of the funds, which makes your regular contribution even higher. Let’s say your employer matches 50 percent of your funds, which would make your regular contribution $150 even though you only put in $100.

Like the SEP, the SIMPLE IRA is less expensive for employers to run their other pension plans, making it a cost-effective option. Also like the SEP, your employer needs to be the one to set up the plan.

What Happens to Your Funds in the IRA?
Once you contribute funds to an IRA, you must leave them in the IRA until the plan’s maturation date. Although withdrawing the funds earlier may be an option, it’s an option that typically comes with stiff penalty fees. Funds you contribute to your IRA can go into different investments of your choice, with a list of investment choices usually available from your plan administrator.
Two common types of investment choices you can make are placing the money in stocks and bonds or placing the money into mutual funds. Both carry some amount of risk since, unlike savings accounts at banks or other financial institution, the money you invest is not FDIC-insured.

  • Stocks and Bonds: Stocks and bonds are choices that let you invest in a company and reap the benefits of its success. On the flip side, investing in a company that doesn’t enjoy success could mean you lose some or all of your investment funds.

While the potential return of stocks and bonds can be high, so can the risk. Investing in stocks and bonds generally works best if the company has a product or service that is likely to grow in need and has the financial stability and history to honor your payout when it comes due.

  • Mutual Funds: Mutual funds are similar to stocks and bonds in the sense of investing in a company’s or enterprise’s success, but the investment goes into a group of companies or enterprises. Mutual funds can be managed by an investment adviser, which is a professional group or individual that has researched and pooled together a group of companies that have a solid record and high odds of success, or you can go for a computer-run plan known as an index fund.

Mutual funds decrease your risk by increasing the odds that at least one of the companies in the group will be successfully and not all of them will fail. Both mutual fund investment advisers and computer-run index funds charge a fee for handling your money, but the fee is typically much lower for the index fund.

Although you can use a traditional savings account to save for retirement, your investment is likely to grow at a much quicker rate if you, instead, invest the money in an IRA. Our tips can get the ball rolling in the right direction, which means the direction that works best for you to secure a future with a feasible income.

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