Understanding IRA's

Opening an individual retirement account or IRA is a smart way to save for retirement. What you might not realize, however, is that not all IRAs are the same. There are actually different types of IRAs, and it’s important to understand the most common options and whether or not they’re right for you.   

Traditional IRAs

A traditional IRA is a very common option for retirement savings. These accounts can either be deductible or nondeductible.

Deductible accounts allow you to take a tax deduction for the contributions you make to your IRA, but you’ll have to pay taxes on your earnings and your original investment when you make a withdrawal.

With nondeductible IRAs, on the other hand, you can either not take a deduction or only take a partial deduction. Either way, you’ll be taxed on your earnings when you make a withdrawal.

A tax professional who is experienced with IRAs can get to know you and your situation, as well as your plans for the IRA, to help you make a decision about whether or not a traditional IRA is right for you and, if so, the best type of account for you to have.

Roth IRAs

Roth IRAs are different from their traditional counterparts in that you don’t get to take a deduction for your contributions. But, you can earn money without paying taxes on it!

Basically, with a Roth arrangement, you pay taxes on your initial investment, but you don’t have to pay them later. Of course, there are some rules in places, such as not being allowed to take distributions until you’re at least 59 and a half and keeping the funds invested for at least five years.

If you can’t follow these rules or if you think there’s a likelihood you might need to make a withdrawal before it’s allowed, this probably isn’t the right IRA for you. Your withdrawal will cause you to have to pay taxes plus a penalty!

As you can see, both IRA types have their benefits and drawbacks. For this reason, you’ll want to go over each option carefully with a financial professional to ensure you choose the absolute best one for you.