Most of us have different expectations from our retirement years but there is one expectation that is common-financial independence. Therefore, it comes as no surprise when every individual invests in a retirement fund conducive to his/her expectations. Many seek comprehensive retirement planning advice from experts before they consider saving. In the United States, many people have Individual retirement arrangement (IRA) that has tax benefits for its holders. The money invested in this plan helps in the reduction of the total tax liability of an individual. IRA was formed by the government in 1974 for safeguard Americans against the disasters of poor pension plans .IRA is of five types namely Roth IRA, Traditional IRA, SEP IRA, SIMPLE IRA and self directed IRA. The section provides retirement planning advice that helps us to understand the different types of IRA.
Types of funding for an IRA
There are several methods to fund individual retirement arrangement plans. Only cash or cash equivalents are permitted in a retirement fund, in case of any other asset being deposited the fund no longer comes under tax benefits. However, in cases of rollovers, transfers and conversions between assets are allowed for any form of asset. There is a maximum limit for contributing to the Roth IRA and traditional IRA or in a combination of both every year. The tax deductions for contributions from the IRA is partially reduced or eliminated for Incomes beyond a certain threshold.
Types of Individual Retirement Arrangement (IRA) accounts
One of the commonest types of retirement plans in of traditional type in which contributions made to the account is without any tax liability. Any investment done in tradition IRA generally ends up being cheaper than an investment that is done outside of the IRA plan. Withdrawals can be made from this account once an individual becomes above 59 years of age. An individual investing in a retirement plan can get respite during the years of accumulation; once the withdrawals start he/she has to pay the tax rates of the current year. A contribution of maximum $5000 could be done in this type of traditional plans. The contributions upper limit may differ for filing single, separately as a married individual, joint filing of for cases not being covered by an employee sponsored retirement plan. There are penalties of rate plus 10% to any withdrawals if they are made before the age of fifty-nine and half years.
In the part 2 of this article, we will focus more on the other types of IRA plans.
Individual Retirement Arrangement (IRA) –Part I