IRA

An Individual Retirement Account (IRA) is a tax-advantaged savings account designed to help individuals save for retirement. IRAs offer significant tax benefits that can help your savings grow faster, but come with contribution limits and rules about when you can withdraw money. There are several types of IRAs. Traditional IRAs allow tax-deductible contributions (subject to income limits if you have a workplace retirement plan), and earnings grow tax-deferred. You pay income tax when you withdraw money in retirement. Roth IRAs are funded with after-tax dollars, but qualified withdrawals in retirement are completely tax-free - including all the investment gains. For 2024, the annual contribution limit for Traditional and Roth IRAs is $7,000 ($8,000 if you're 50 or older). These limits apply to your combined contributions to all IRAs. Roth IRA eligibility phases out at higher income levels, while Traditional IRA deduction limits depend on whether you have access to a workplace retirement plan. SEP IRAs (Simplified Employee Pension) and SIMPLE IRAs are designed for self-employed individuals and small businesses. They have higher contribution limits than Traditional and Roth IRAs, making them valuable for business owners looking to maximize retirement savings. The tax advantages of IRAs can significantly boost long-term wealth. In a taxable account, you pay taxes on dividends, interest, and capital gains each year. In an IRA, these earnings compound tax-free (Roth) or tax-deferred (Traditional) until withdrawal, potentially resulting in much larger account balances over time. Early withdrawals from IRAs (before age 59½) generally trigger income taxes plus a 10% penalty, though exceptions exist for certain circumstances like first-time home purchases or medical expenses. Required Minimum Distributions (RMDs) must begin at age 73 for Traditional IRAs, though Roth IRAs have no RMDs during the owner's lifetime. Understanding IRA rules and choosing between Traditional and Roth IRAs depends on your current and expected future tax situation, making consultation with a financial advisor worthwhile for many investors.