Newsletter

IRA's

We have discussed the benefits and the variations of the 401k plans to help secure a healthy retirement. There are other options that are out there that have their own benefits and may appeal to you when it comes to how you are planning on spending your golden years. IRA’s or Individual Retirement Accounts acquire interest on your contributions and are accessible when you reach a specified age for retirement. They are great on their own or can be used in combination with an employer supported 401k.

There are two types of IRA’s, a Traditional and Roth. Both come with advantages and disadvantages. Both IRA’s limit the amount you can contribute each year. Those under the age of 50 can only contribute $4,000 a year, and people 50 and older can contribute $5,000 a year. Those limits will rise in the year 2008. You cannot contribute more than you make for the year however. For example, if a college student who made $3,000 last year but had money left over from a student loan or received money from a relative can still only contribute $3,000 for that year.

Traditional IRA:

A big benefit with a Traditional IRA is the tax benefits. A Traditional IRA is an account that you can put money into tax-free, meaning when you deposit money into the IRA you can deduct that amount from your personal income before you pay federal income taxes. However, when you start to withdraw from it when you retire it will be taxed based on the tax bracket you fall into.

Any money that you withdraw from your IRA is subject to a 10% fee until you reach the age of 591/2. Then you can withdraw without a fee but again it will become taxable income. When you are 701/2 you must start to withdraw the money. Once you begin to take money out there is a annual minimum amount required that you have to take out. This starts anytime after the 591/2 age deadline.

Roth IRA:

The main difference between a Roth IRA and a Traditional IRA is when the money is taxed. Contributions to a Roth IRA are not tax deductible like those of the traditional IRA. But unlike the Traditional IRA, any withdraws you make will not be taxed. Basically, Roth IRA’s tax money that you put in while, Traditional IRA’s tax money that you take out.

There are other benefits for a Roth IRA. Even though the purpose is to save for retirement, you can withdraw your contributions at anytime tax-free and without penalty. Anything you borrow that is over the contribution limit is subject to both taxes and penalties.

A Roth IRA can help you achieve the American Dream. You can cash out up to $10,000 from your Roth IRA including earnings, tax and penalty free to go towards buying your first home. The account must be open for at least 5 years though. Couples can withdraw up to $20,000 if each of them has their own account.

Just like the Traditional IRA you can begin to withdraw earnings penalty free once you reach the age of 591/2. There are no forced distributions once you turn 701/2 and no annual minimal distribution mandates.

The money you contribute to a Traditional IRA is true money, meaning that every dollar that you contribute equals that value and will gain that much more interest. A Roth IRA is taxed and therefore not equal value. When you contribute $4,000 into a Traditional IRA, all $4,000 is gaining interest. When you contribute $4,000 into a Roth IRA it is taxed first and only the remaining $3,600 is gaining interest.

To sign up for an IRA account you will want to contact a broker, mutual fund company, or even your bank. This depends on what you want to invest your money in. Shop around and talk to many different people until you are comfortable with one.

You will want to choose the IRA that you are more comfortable with and the one that you think gives you the best results. If you think that you might be in a higher tax bracket when you retire then a Roth IRA may be a better choice, but if you might be in a lower tax bracket upon retirement than the Traditional IRA will benefit you most.

An IRA is just another way for you to prepare for your well-being into your retirement. Investing can be a big scary obstacle for many people, but there are safe ways for it to be successful. Before you know it you will be enjoying your golden years criss-crossing the U.S. in your loaded motor home.

We will continue to search and write about other minor investment options that will have your money working for you.

Pioneer Credit Counseling is a bonded, non-profit credit counseling agency offering debt management programs, financial counseling, bankruptcy counseling and housing counseling nationwide. Call our friendly counselors today at 800-888-1596 or visit www.pioneercredit.com.

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It is our policy at Pioneer Credit Counseling not only to help people get out of debt, but also educate in sound budgeting practices.

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