Individual retirement accounts started gaining popularity in the 1970s. There are two popular kinds of IRAs, one of which is a traditional retirement account. With this kind of account, contributions you make to it are usually tax deductible depending on your income, tax-filing status and a few other factors. As you make deposits, your money will continue to grow while you benefit from certain tax advantages like an income tax break. However, be aware that you pay taxes on any withdrawal of funds. One could then argue that utilizing the current tax benefits of a traditional IRA is not a way to eliminate taxes, simply postpone them.
The other most well-known kind of IRA is called a Roth retirement account. With this kind of retirement plan, the funds you contribute to the account come from your adjusted gross income, or AGI. This is your income after taxes, so the money you withdraw is not taxed again, a benefit that gives this option great acclaim. The greatest time you can utilize this is during a time when income taxes are increasing, which happens to be how it is now. Traditional IRAs give you a tax break now, but with climbing income tax rates, it makes more sense to do without the break now and enjoy a tax-free retirement when rates are even higher.
Usually, with a traditional retirement account, there are little or no restrictions as to the amount you can withdraw from the account. You can do it any time, but you must pay taxes on whatever amount you take out. This is because the amount was never taxed in the first place, and the distribution from a traditional retirement account is treated like regular income. There are restrictions as to how much you can put into a traditional IRA depending on a combination of your income and filing status. Also, unlike with a Roth account, you must withdraw everything from the account when you reach 70½ years old and pay necessary taxes then. By this age, your retirement has begun and you can begin to enjoy the savings have you accumulated over the years.
As you consider the benefits of a traditional IRA, keep in mind that there are other options you should consider as well. While a few competing IRA options have been created since the birth of the idea several decades ago, many prefer the longest-established way of planning for retirement. Discuss your options with a financial advisor to determine the best personal option for you.
