What is an IRA and why have one?
An Individual Retirement Account (IRA) is one of the best
ways to save for retirement. Your IRA contributions can grow
on either a federally tax-free or tax-deferred basis, which
lets earnings in the account compound over time. Money in
tax-smart accounts like IRAs and 401(k)s can compound faster
than money in taxable accounts.
What’s the benefit of
starting early?
When you start early, even small IRA contributions can have a
big impact on your future due to the power of compounded
growth. Money in your IRA is not taxed, which means your
savings can grow much faster than in a taxable account. So by
investing early in an IRA, you can earn more over time than
you could in a regular savings account. While it’s
never too late to start, the later it gets, the more you may
have to put away to reach your goal.
If I have a 401(k), should I still
open an IRA?
To save as much as possible for your retirement, it’s
best to max out both your 401(k) and IRA. Can’t afford
to fully fund both? Consider contributing to your 401(k) at
least up to the amount your employer matches. Then contribute
to either a Traditional IRA, which typically offers more
investment choices than a 401(k), or a Roth IRA, which grows
tax-free.
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There are two types of IRAs for individuals, the Roth IRA and the Traditional IRA. Each IRA has advantages and can help you reach your retirement goals.
The Traditional IRA offers tax-deferred growth — which means you do not pay taxes on the earnings in your IRA until you withdraw them. Also, depending on your income level, your contributions to a Traditional IRA may be tax deductible.
With the Roth IRA, contributions are made on an after tax basis, earnings grow tax-free and any withdrawals are free from Federal taxes assuming you are age 59½ and have held the account for at least 5 years.