Plan for the Future with an Individual Retirement Account

As you plan for your financial future, one of the greatest assets you can have is an individual retirement account (IRA). An IRA allows you to save money, earn interest and enjoy tax benefits with one simple account. Though it might be tough to find the extra cash to set aside in today’s economy, it’s important to remember the benefits of saving for retirement early on. When you reach retirement age, you’ll be happy that you started investing while you still had a regular income. If you’re struggling to make ends meet, an IRA is a great way to save and accrue tax benefits at the same time.

The Basic IRA Rules You Need to Know
While IRAs are a good solution for consumers looking to plan ahead, there are some limitations you’ll need to keep in mind. Most IRAs limit your contributions to 5,000 dollars per year, though some will allow you to invest more once you are over the age of 50. Additionally, you are not able to withdraw money from your individual retirement account without penalty until you reach the age of 59 1/2. Some IRAs will also require you to begin receiving distributions after age 70 1/2.

Enjoy Tax Benefits Now or During Retirement
IRAs are popular because they allow investors to receive tax benefits simply by saving for retirement. However, it’s up to you to decide when you’ll receive those tax benefits. Most IRAs give you tax benefits upfront by deducting the amount you invest from your taxable income. This is a good solution if you think your future income will make you eligible for a lower tax bracket during retirement. With a Roth IRA, you’ll still pay taxes on all of your income, including your investments. Once you retire, though, you’ll be able to withdraw money from your IRA tax-free.

Choose the Right IRA for Your Financial Situation
Before opening an individual retirement account, it’s important to consider the various types available and to choose the one that works best for your financial situation. Many people choose traditional IRAs in order to receive immediate tax benefits, while others choose Roth IRAs because they estimate that their income will require them to pay more taxes during retirement.

There are also IRAs available such as the Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA. Both of these IRAs are intended for use by self-employed individuals, as well as by small business owners who prefer to contribute to employee IRAs rather than pension plans. Generally, they are most similar to a traditional IRA. Investors earn their tax benefits upfront through income deductions, and they pay taxes later on withdrawn amounts.

You can also plan for your child’s educational expenses by opening a Coverdell Education Savings Account. Formerly referred to as the Educational IRA, a Coverdell Education Savings Account allows parents to save money for a child’s tuition and schooling expenses at the elementary, secondary or collegiate levels. Both investing and withdrawing are tax-free, which makes them a popular choice for parents looking to save.

Use Your IRA with Other Investments
While an individual retirement account is a great investment strategy, investors are subject to strict limitations because of the tax benefits they receive. If you’re interested in investing more than the allowed 5,000 dollars per year, it’s best to invest what you can into an IRA and to open additional investment vehicles for your surplus savings. After you’ve maxed out your IRA contributions for the year, look into the interest rates you could earn with certificates of deposit, money market accounts and standard savings accounts.

Victoria Lee is an experienced author with a special interest in finance. Based in New York, she gives advice on investing your money and the benefits of an individual retirement account. Her favorite pastime is reading up on the latest finance news and she saves her best tips for her finance information pages: http://www.squidoo.com/lensmasters/FinancialTips4U at Squidoo.