Learn your investment options and get investment tips in this free lesson so you have a better understanding of how investing works.
Types of IRAs
If you think an IRA may be an investment worth exploring, be aware of your options to decide which one is right for you. There are two basic kinds of IRAs:
- Traditional IRA: This type allows you to defer taxes on your earnings until you withdraw them. Certain contributions are tax deductible on your tax return depending on your income tax filing status. If you withdraw the funds after age 59½, you pay a regular income tax rate. However, If you withdraw it before age 59½, you will likely have to pay income tax and a 10 percent to 25 percent penalty on any earnings. If the funds are used to pay for education expenses or for one of nine exceptions, the 10 percent early withdrawal penalty does not apply. Distributions must begin by April 1 after the year you turn 70.
- Roth IRA: Contributions to this account are not tax deductible. It allows tax-free withdrawals after you reach age 59½, and before that time under certain conditions. Unlike a traditional IRA, which requires you to withdraw money by age 70½, a Roth IRA allows you to leave your account intact for as long as you wish. People who expect to be in a higher tax bracket when they retire may benefit more from these accounts than from traditional IRAs.
Withdrawals from either a Roth or traditional IRA if used for a first-time home purchase up to $10,000 are not subject to the 10 percent penalty for early withdrawal.
You can generally open an IRA at a financial institution or brokerage. Expect to pay an annual fee of between $10 and $45 for handling the account. Conduct some research to find banks and brokerages that charge low rates.
If you change jobs, you can move any money in an existing 401(k) account into a rollover IRA or into your new company's 401(k). Legislation passed in 2002 also allows 401(k) funds to be rolled over into a 403(b) plan and vice versa if the specific plan allows for such rollovers.
For more information on IRAs, visit Individuals Retirement Arrangements - Getting Started from the IRS.