IRAs, or Individual Retirement Accounts, are a lesser-known tool through which people can save for retirement. If you ask someone what an IRA is, they might be able to untangle the abbreviation but the average person is unlikely to be able to tell you anything significant about IRAs.
We’re here to fix that today. Here are three facts about IRA accounts to help you and your child get familiar with what we’re calling the “forgotten sibling” of retirement savings.
1. An IRA is a tax-free or tax-deferred way to save for retirement
An IRA is a way for consumers earning taxable income to save for retirement either tax-free or tax-deferred. In other words, the earnings in an account of this nature are designed to grow tax-free. In other situations, contributions made to an IRA can be tax-free, such as in a Roth IRA (more on that later). Even furthermore, a traditional IRA (again, more on that later) offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals in retirement and not progressively as you add money to this account prior to when you eventually retire.
2. There are three basic types of IRAs
Traditional IRA: This type of IRA is one where you make contributions with money you may be able to deduct on your tax return and earnings can potentially grow tax-deferred until you withdraw them in retirement.
Roth IRA: A Roth IRA is a type of account where you contribute money to the account exclusively with after-tax earnings where your money may potentially grow tax-free and you may be afforded the opportunity to make tax-free withdrawals in retirement assuming particular conditions are met.
Rollover IRA: This final type of basic IRA allows you to contribute money that you have “rolled over” from another type of qualified retirement savings tool or account. Rollovers involve moving eligible assets from places such as a 401(K) into an IRA.
3. Your IRA is exclusively YOURS
Unlike an employer-driven 401(K), an IRA puts you in complete control of your retirement savings. Whereas, with a 401(K), an employer can change plans or limit investment options without consulting you or allowing you to express your thoughts, your ability to change and adapt your IRA is not restricted if you change careers etc. In some ways, an IRA takes away the financial stress that may come from managing other retirement saving tools. Your ability to contribute to something like a 401(K) should you decide to make a career change is also compromised when you leave that initial job in a way that it is not should you have your money and retirement savings tied to an IRA. To sum this all up in less words, the control is yours and yours only with an IRA and control is the best thing you can have when it comes to saving money for when you are no longer earning money in retirement.
We hope that this blog, presumably because you are an adult slowly nearing eventual relaxation and bliss in retirement, is helpful in either opening a door that either was not open before or further opening the “IRA door” in front of you to provide with knowledge of a much lesser known retirement savings tool than some of the more traditional ones.
Now that we’ve got you covered, are you thinking you want to share this knowledge with your child in order to help them get a head start on understanding their distant financial future? Hop on over to our website now and register your child for one of our personal finance programs, where we take children from grades 1 all the way to 12 through our courses about everything from budgeting and saving money now to paying their taxes and more!
We hope to see your child enrolled in one of our classes very soon! Happy thinking about retirement!