Individual Retirement Account
Protect Your Future With the Right IRA Account:
If you have income from wages or self-employment, you might be able to shelter some of that money from taxes while saving for your future retirement. An individual retirement account (IRA) provides tax savings, either now or in the future, giving you the advantage of tax-deferred or tax-free growth while you save and plan for your post-work life.
There are of course a number of different IRA accounts available, and choosing the right account can maximize your profits while minimizing your tax bill. There is no one right IRA for every investor. The key is to look at your own situation and choose an account based on your tax rate, earnings and other needs
Traditional IRA
A traditional IRA gives you a tax break for the year you made your contribution. When you file your taxes, you can take a tax deduction for that contribution. That can make the money you invest even more valuable, since it lowers your taxable income and gives you more money to invest with.
You do pay taxes on the money accumulated in your traditional IRA once you start drawing it out in retirement. You pay taxes on those funds at your regular income tax rate.
Roth IRA
A Roth IRA works exactly opposite of a traditional one. With a Roth IRA, you do not get a tax deduction when you make the contribution, meaning that you make your contribution with after-tax dollars But when you retire, you can withdraw that money tax-free, making the Roth IRA potentially even more valuable.
Roth IRA accounts can be particularly good choices for younger workers, who have decades during which those funds an grow and compound tax-free. Roth IRA accounts may not be as suitable for older workers nearing retirement, since the money will have less time to grow, which can reduce the value of those tax-free withdrawals
SEP-IRA
If you have income from self-employment, you can put some of that income aside in a Simplified Employee Pension, or SEP-IRA. Opening a SEP-IRA lowers your taxable income and therefore your taxes as well, while allowing you to save and invest for the future.
If you have both wage income and income from self-employment, you can invest in a SEP-IRA and still fully fund either a traditional or Roth IRA, provided you meet the income criteria established by the IRS This is an important consideration, since so many people are looking to side businesses and freelance work to supplement their incomes.
Contribution Limits
The contribution limits for all IRA accounts are subject to change, so it is important to check the IRS website before making your annual deposit. For 2011, you can contribute up to $5,000 to a traditional or Roth IRA, plus an extra $1,000 if you are at least 50 years of age.
The upper limit for contributions to a SEP-IRA is $49,000, but the actual amount you can put aside is determined by your earnings. You can use a SEP-IRA calculator to determine your maximum allowable contribution based on your prior year earnings.