IRA Basics

"The way to get started is to quit talking and begin doing." -Walt Disney

The IRA is the best way for you to save for your future while at the same time avoiding taxes. It is the best of both worlds! There are three basic types of IRAs. They include a Regular IRA, an Education IRA, and a Roth IRA. Educational IRAs are now called Coverdell Education Savings Accounts. This type of IRA allows a parent to save for their children's education. They are allowed to save money in the account without having to pay taxes on that money.

Parents can open accounts for any child under the age of 18. Not only is the money not taxed but the parent receives a tax break on the amount of money placed into an account. Parents can place up to $ 2000 dollars each year, for each child, into an Education IRA. In addition, because it is an education fund, there is no penalty or tax when you need the money for higher education costs.

Regular IRAs let you place money into your account and then take a tax deduction for the amount you saved. However, the money in a Regular IRA can not be touched until the age of retirement. Money access before retirement is subject to early withdrawal fees and taxation. Once you have reached the age of retirement then you can access your money and you will only be taxed on what you use. The goal and benefit of all IRAs is that it let's the owner invest money which will not be taxed. This money is left to accumulate in a tax free environment. IRAs are great way to accumulate capital and is considered a passive income.

Roth IRAs are the easiest to understand and use of all IRAs. Financial experts also consider them the most effective and efficient investment around. Roth IRAs are structured differently. Money placed in a Roth IRA is after taxes and you do not get a deduction for it. However, the appreciation of that capital is tax free. Once you place money into a Roth IRA it will never be taxed again. Even if you withdrawal money after retirement, it will not be subject to taxation. There is also no time requirement for withdrawal.

You do not have to wait until retirement to start drawing an income from this type of IRA. This is because you have already paid taxes on the money and the withdrawals are not considered an income you need to report to the government. Selecting and managing an IRA can be a complicated process. If you are interested in an IRA, contact your financial advisor or speak with an accountant for further information.

Source by Mika Hamilton

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