An IRA, or Individual Retirement Account, can offer several benefits that make it easier for people to save for the future while lowering your tax burden. Over time, your Core Wealth IRA can blossom into a significant amount of money, even if you only contribute a modest amount each year. Before you decide to open an IRA, though, you should understand the benefits and details of these accounts.
Types of IRA Accounts
There are five types of IRA accounts
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Self-Directed IRA
The traditional and Roth IRA accounts are by far the most popular options. If you own your own business, however, you might consider starting a SEP IRA account, which acts like a company pension plan for the self-employed.
Benefits of a Traditional IRA
Traditional IRA accounts give their owners immediate tax benefits. The IRS considers money contributed to a traditional IRA has non-taxable income. The IRS will collect taxes on the money that you withdraw from the account during retirement. For most people, though, it makes sense to prolong this tax burden because they fall into lower tax brackets during retirement. That means they spend less on taxes during the course of their lives.
Investors with traditional Core Wealth IRA accounts can also choose to switch over to Roth IRA accounts. This can offer additional advantages as your financial situation changes throughout life. Investors who start with Roth IRA accounts, however, cannot convert them to traditional accounts.
Benefits of a Roth IRA
Investors pay money on their Roth IRA contributions, but they do not have to pay taxes on the money that they withdraw from their accounts after retirement. Many people prefer paying taxes early in life while they have a steady source of income. That way, they don’t have to worry about paying as many taxes after retirement.
Roth IRAs will even let investors withdraw up to $10,000 without tax penalties before retirement, as long as they use the money to purchase a principal residence. Using this option can increase one’s down payment, thus lowering the overall interest that they pay their mortgage holder.
Contributing Money to Core Wealth IRA Accounts
Traditional and Roth IRAs have contribution limits. Currently, people age 49 and under can contribute up to $5,000 and people age 50 and over can contribute $6,000 per year. Limits should increase in coming years. Both types of accounts have the same contribution limits, so that shouldn’t have a large impact when deciding which option works best for you.
IRAs, like all investments, involve some level of risk. Typically, though, IRAs work well because they spread investments out over several markets. If one falters, the others can lessen the financial blow. Core Wealth can also help IRA investors choose a level of risk that matches their expectations. In many cases, young people find that they benefit from riskier investments. As they age, though, they might need to change their approach to making sure they keep the money they have already earned.
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