Definition of "Individual retirement account (IRA)"
When we are young, we usually don’t take our retirement seriously and don’t even know the definition of an Individual Retirement Account (IRA). We become more preoccupied with it once we get our first job and earn our first salary. So what exactly is an Individual Retirement Account (IRA)? It is an account where you can deposit money that will serve you in your retirement years. Money directed towards your IRA account is tax deductible.
An IRA account will pay you interest so the economies will grow over the years depending on your risk tolerance and number of years to retirement. You may choose a more conservative approach or a riskier one. Federal Deposit Insurance Corporation covers your savings up to $250,000. You may also open an IRA account with a brokerage, in which case Securities Investor Protection Corporation covers your balance up to $500,000.
It is also good to know that IRAs are either traditional or Roth IRA. The main difference between them is that the latter allows you to avoid taxes and penalties since it is made up of after-tax dollars. Secondly, you may withdraw your money from a Roth IRA account at any time, as long as they are not converted from a traditional IRA. You cannot touch the earnings either without being taxed. When you convert a traditional IRA to a Roth IRA, you have to wait at least 5 years before withdrawing, and you have to be at least 59 ½ years old to make “qualified distributions”. To avoid the 10% tax on withdrawals from your traditional IRA or Roth IRA, you must use the funds for the following purposes:
- To pay for education (you may cover college education for yourself, your spouse, your children and grandchildren).
- To pay for your first house (up to $10,000 for a down payment).
- To provide income after acquiring a permanent disability.
Who qualifies for an IRA? Almost everybody, but a few age limits must be remembered. For traditional IRA accounts, only employees or people who receive taxable income can contribute to an IRA as long as they are under 70 ½ years of age. There is no age limit for Roth IRA holders. In 2019, married couples filing jointly for a Roth IRA and earning less than $193,000, can contribute up to $6,000 a year (or $7,000 a year if 50 or older). Those who are single, head of household or married filing separately may contribute the same amounts as long as they earn less than $122,000. As you can see, there are maximum limits, but no minimums, so you can open an IRA account with as little as $1,000. When it comes to retirement planning, the sooner you start, the better!
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