IRA stands for Individual Retirement Account and refers to an account setup that allows people to save money for his retirement with a tax-deferred basis or a tax-free growth. The three major types of Individual Retirement Accounts include Traditional, Rollover, and Roth.
The first type, called Traditional IRA, involves making monetary contributions which may be deducted on your tax return and whatever earnings you may have can eventually grow tax-deferred until the money is withdrawn in your retirement. A lot of retirees are under a lower tax bracket compared to when they were in the pre-retirement stage. Through the tax-deferral, the money of the person will be subjected to a lower tax rate.
On the other hand, the Rollover IRA refers to a Traditional IRA which is intended for money that is rolled over from a particular retirement plan. The Rollover IRA also involves the transferring of qualified assets from a plan sponsored by the employer to the IRA.
Lastly, the Roth IRA involves making monetary contributions that are after-tax and your money can also grow free of tax. As long as the individual meets the conditions, the individual can also make tax-free withdrawals during his retirement.
No matter which type of Individual Retirement Account you choose, the tax advantages that are offered will enable your savings to compound or grow much faster compared to a taxable account. According to financial experts, an estimated 85% of the pre-retirement earnings is needed in the retirement. Since the different savings plans sponsored by the employer is usually not sufficient to gather the savings that an individual needs, investing in an IRA is recommended.
An IRA can help an individual augment his savings in the employer-sponsored plan, enjoy the benefits of tax-deferral and tax-free growth, as well as have an access to a wider scope of investment options. In order to get the most out of this, it is also advised to make the maximum contribution each year and monitor your investments.