Polls indicate that most Americans haven’t saved enough for retirement. While the reasons for this are varied, many people find themselves confused by the basics, wondering, “What is an IRA account, anyway?”
Individual retirement accounts, or IRAs, are a tax gift from Uncle Sam. Essentially, the IRA label on an account tells financial institutions and the IRS that the account is for retirement and gets special tax treatment.
There are 2 basic types of IRAs available to individuals:
The main requirement for contributing to an IRA, either Roth or traditional, is that you must have earned income, says Denise Halford Holder, CFP professional, first vice president of wealth management at Noyes Group in Indianapolis.
A non-working spouse is an exception, however. If one person in a married couple has earned income, the spouse can still put money away, she says.
Don’t let potential early withdrawal penalties scare you.
The Roth IRA allows a little more flexibility for savers who might need to access their funds.
That’s because your contributions to a Roth IRA can be taken out at any time. The earnings, however, must stay in the account until it has been open for 5 years and the owner is at least age 59 1/2 or the distribution is subject to income taxes and the 10% penalty.
The penalty for early withdrawals from a traditional IRA is much easier to remember. Anything taken out before age 59 1/2 is going to be taxed and penalized.
There are a few circumstances where the IRS has deemed it OK to tap your IRA early.
“Traditional IRAs are nothing more than a tax-deferred retirement account,” says Burt Drobnis, senior vice president at Lantern Investments in San Francisco.
“Unfortunately, more people don’t take advantage of it,” he says.
About half of Americans over age 55 have no retirement savings, according to a study released by the Government Accountability Office in May 2015.
You don’t have to save the maximum every year. Just start saving a little in an IRA and Uncle Sam will give you a little tax boost to turbocharge those savings.