Understanding the basics of an Individual Retirement Account (IRA). This is a brief IRA 101 article defining what is an IRA.
An Individual Retirement Account (IRA) is an account into which a person can contribute up to a specific amount every year. The growth on IRA funds is typically tax deferred and, depending on personal circumstances, contributions may be tax deductible. Withdrawals from traditional IRAs are taxed at current rates.
An IRA is the primary way many people invest for retirement when they don’t have access to a 401(k) or employer-sponsored retirement plan at work. Others use it to supplement the contributions to their employer’s plan in an effort to maximize savings.
A traditional IRA allows you to make annual contributions that you can typically claim as an IRA tax deduction. Instead of paying taxes on the money you contribute now, you defer those tax payments until retirement, at which point you pay taxes on your withdrawals.
A Roth IRA account has many features that are similar to a traditional IRA account, but its tax advantages are different. Essentially, contributions to a Roth IRA account are not tax deductible when you file taxes for the year. Instead, the contributions typically provide tax-free income on all your withdrawals and earnings once you’re in retirement.
So, when choosing between a traditional or a Roth IRA, it’s a matter of deciding whether you think it’s best to pay taxes now, at your current tax rate, or later when you’re retired.
For Roth IRAs:
Traditional and Roth IRAs can be good ways to save for retirement and offer some potential benefits. The type you choose should align with your goals and financial situation. Still not sure which one that is? Check out the IRA tools and resources on tdameritrade.com to help you decide. The most important thing is to get started and take control of your retirement.
Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different. TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before contributing to your IRA.
Also, watch this video to learn more about IRAs.
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