Building Your Retirement Kitty Using IRA

Before you retire, you should build some funds that can last your life after retirement. After all those years of hard work, who wouldn’t a comfortable and hassle free life. That is why I highly recommend that you give financial planning for retirement a serious thought and plan well for the sunset years.

There are several options available to you with which you can build adequate retirement funds. One way of adding more to these funds is to look for those investment options that will help you save on  taxes. That way, you will have more money to collect as savings when you retire.

One of the good options for building retirement funds is by using an individual retirement account (IRA). IRA account can be used to keep various investments like CDs, mutual funds, stocks and bonds and other instruments, but not derivatives.

IRAs give the benefit of tax deferral, that is, you do not need to pay tax now and can pay it when you withdraw money. Tax deferral increases the amount that you will get to withdraw, as you have to pay a certain percentage of tax once instead of paying it every year.

In case of a traditional IRA, any person who is self-employed, working for someone or is getting alimony can continue to invest till he or she turns 70 ½. However, there are contribution limits to IRA. If you are not covered by any other employer sponsored retirement plan, then IRA contribution is deductible from gross income on which you pay tax. This means you can use traditional IRA to be eligible for lower tax rate by adjusting your gross income. The disadvantage is that even the long-term investments will be taxed as ordinary income if deposited in an IRA. Withdrawal before the age of 59 ½ which is not returned in 60 days, has a 10% penalty attached to it, in addition to ordinary income taxes on the withdrawal. There are certain exceptions to this rule such as withdrawal for first home, higher education, medical bills or on disability or death.

In case of Roth IRA, you will not get benefit of tax deduction now, but you do not have to pay tax on your earnings later when you withdraw funds. There is no penalty for early withdrawal or any specifications on when you need to start withdrawing money. Your withdrawal will be tax-free and you can use the account for various investments.

There are various other IRAs also, such as self-directed IRAs that are opened with brokers and SEP and SIMPLE IRAs that are opened by employers. All these IRAs have their own advantages and disadvantages and you should check on the details before opting for one.

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