IRA ABCs: What You Need to Know

When it comes to saving money for retirement, there are numerous options at your disposal.

In addition to employer-sponsored retirement accounts such as a 401(k) or a 403(b), most people have the option of boosting their retirement savings using an IRA.  

“Although IRAs can play a vital role in helping individuals reach their retirement goals, not everyone fully appreciates the benefits,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “People looking for an additional outlet to save for retirement may want to carefully consider the benefits these types of accounts bring.”

Here is some basic information about these accounts and how they can be used to help you secure a comfortable retirement.

What are IRAs?

An IRA, which stands for Individual Retirement Account, is an investment account geared toward retirement that can provide tax savings. Inside these accounts, people have the option of investing in stocks, bonds, mutual funds, exchange-traded funds (ETFs) and pretty much any other major security.

What types of IRAs are there?

There are several different kinds of IRAs:

  • Traditional IRA: A retirement account where your contributions may be tax-deductible and your earnings grow tax-deferred.
  • Roth IRA: A retirement account where withdrawals may be taken tax-free. Unlike the Traditional IRA, you can’t write off the contribution, but earnings grow tax-free, if you follow withdrawal rules.
  • Rollover IRA: A Traditional or Roth IRA where money from an employer-sponsored retirement plan – such as a 401(k) – or other IRAs can be transferred into a new IRA account without, in many cases, incurring tax penalties. Rollover IRAs can help make it easier to manage your portfolio by moving your assets into one place.
  • SIMPLE IRA: A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA is an IRA for self-employed individuals or for small businesses
  • SEP IRA: A SEP (Simplified Employee Pension) IRA is an IRA plan where employers can make tax-deductible contributions.

For more detailed information regarding each of these accounts, visit the IRA website.

How much can someone invest in an IRA?

For the maximum contribution rate, you can check out IRS.gov. If you’re age 50 or older, you usually can contribute an additional sum, often referred to as a catch-up provision. 

In addition, there are rules restricting tax deductions of Traditional IRA contributions for higher-income earners who have access to a 401(k) or other employer-sponsored retirement plan. In addition, there are income restrictions on Roth IRA contributions. For more information about these rules, visit the IRA FAQ page on the Internal Revenue Service’s website.

When can you withdraw money from an IRA? 

If you’re under 59½ years of age and withdraw from a Traditional IRA, you could be slapped with a 10% penalty and potential taxes on the amount withdrawn. For Roth IRAs, you can generally withdraw contributions at any time without penalty. Earnings can be withdrawn penalty-free after you turn 59½ and have had your Roth account open for at least 5 years.

These rules are generalities; there are numerous exceptions to each of the rules. The IRS explains these exceptions more in-depth.

What role do IRAs play in your retirement strategy?

Interested in learning more about IRAs?  Visit Scottrade’s retirement page to learn about the IRA accounts available, the benefits of using each and how to open an account.

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.

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