What is an IRA?

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    Nov 22, 2012
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What is an IRA?

IRA, or the individual retirement account, is, in essence, a personal account for people who are currently employed. This tex-deferred account is also for the spouses of people who are successfully employed. Setting up an IRA is not difficult and can be easily down through any bank, insurance firm or brokerage. There is a wide range of investment options that you can choose from. Your earnings will be completely untaxed as long as they are paid out of the individual retirement account.

Types of IRA

There are various types of individual retirement account:

1) Traditional - A traditional IRA contributions are usually tax-deductible. In other words, money is deposited into the account before tax. All the earnings as well as transactions within the account have no tax impact. Withdrawals at the time of retirement are taxed as per the income.

2) Roth - This type of account is funded with after-tax assets. All the transactions happen without any tax impact and withdrawals are often tax-free.

3) SEP - The SEP IRA is essentially a provision that lets an employer, usually the owner of a small business or someone who is self-employed, to make retirement plan contributions into a traditional individual retirement account.  The account is established into the name of an employee and acts as an alternative to pension funds that are started in a firm's name.

4) Self-Directed - This type of IRA works by letting an account holder make investments on the behalf of the whole retirement plan.

An IRA is a good option but not everyone can take advantage of it. There are some restrictions attached to each type of IRA based on a person's individual income as well as employment status. There are also caps on how many contributions can be made in a year, or how much. An account holder might also have to suffer penalties if he/she tries to pull the funds out before the designated retirement age.

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