IRAs offer a convenient
way to increase a person's savings for retirement. They offer a huge variety
of investment options that allows them to be tailored to almost any investor.
And, they offer tax advantages that make them attractive to nearly every
investor. An IRA allows the investor the freedom to choose where his/her
money is invested. A bank gives a great deal of security and allows an
account to be opened for a very small amount of money, usually around
$100. Mutual funds are a good option for less experienced investors who
want to the safety of spreading his/her money around but with the possibility
for greater gains. The minimum investment is usually $1,000. A brokerage
allows an experienced investor total freedom the stocks they choose. The
risk is greater, but so is the possibility for gains.
IRAs are convenient because
they offer certain tax benefits.
The IRA you choose should
be based on what tax benefits you want to reap or more precisely
when you want to reap them.
This ability to choose
when you earn your benefits is a recent advent of a new type of
IRA.
There are two types of retirement
IRA's
Traditional IRA
An investor needs to
identify what his/her tax rate will be at retirement. With a traditional
form of an IRA, taxes are paid when money is withdrawn, but contributions
to the account are tax deductible.
Roth IRA
This is the newest
form of an IRA. The Roth IRA was created in the mid 1980's. If an
investor has a gross income less than $110,000 and might be in a
higher tax bracket when retiring, a Roth IRA is beneficial. Contributions
are not tax-deductible, but savings are withdrawn tax-free.
In both of the
above instances, the maximum amount you can contribute is $3,000
per year ($3,500 if you are over 50). That number will be going
up to $4,000 in 2005 and $5,000 in 2008.
Kids and a Roth IRA
There is no limit to the
age a child can contribute to a Roth IRA.
The child must earn the
money.
The contribution limit
is still $3,000.
The potential gains and
benefits are huge! The interest is earned and compounded over an extended
period of time.
The amount earned
is usually too small to be taxed and is not taxable when withdrawn!
By starting young, children
make their savings for retirement considerably easier.
