The Individual Retirement Account

by Jeff C. Johnson

 April 18, 2017, is the deadline for 2016

Dollar sign

The IRA is the place where most regular, working folks end up with their largest pile of money.

Here are a couple of important reasons why this is true:

  1. The IRA is the place where money can go and be treated to tax advantages
  2. It’s usually long-term money, so it can be invested for long-term growth (this is especially true for young people)

Let’s look at these two points a little deeper.

The tax treatment is important and also offers savers some choices. First, with the “traditional IRA” you can make deposits to an IRA and these contributions could be tax-deductible, reducing your taxes for the current year. The invested money then grows at the return rate of the underlying investment, without current taxation, so all the earnings get to grow for years until money is withdrawn for retirement income.

Income withdrawals from an IRA are then taxable, but possibly at a lower income tax rate than when the saver was working and making investments.

A “Roth” IRA is kind of the opposite in tax treatment. When the deposit is made, there is no tax deduction as with the traditional IRA, though the money grows without taxation.

However, income withdrawn from a Roth IRA is income tax free. No tax-advantaged deduction up front, but a tax-advantaged withdrawal for life.

The IRA is the place where you can transfer (without taxation) the saved balance in your retirement plan when you change jobs, keeping your retirement savings in one place for simplicity of management.

This is only the tip of the story. There are many details not covered, income levels that impact decision making, and limitations that should be discussed, preferably with a seasoned financial or tax professional.

And it’s not too late to think about making a contribution for 2016. The deadline is April 18, 2017, but there’s no reason to wait until the last day.

Image credit: Svilen.milev/Wikimedia Commons