IRA 101

What exactly is an IRA? IRA stands for Individual Retirement Account. IRA's are essentially retirement plans that give you income tax advantages. If you invest in an IRA, you often eligible, in the year of investment, for an income tax deduction. If you withdraw money before retirement age (officially 59½) you are usually taxed for about 10% of what you withdraw.

Individual Retirement Accounts are great ways to save money for retirement, but come in a couple different flavors. Which one should you choose? Here's the breakdown:

Traditional IRA: Until you reach a high income level, contributions to a Traditional IRA are tax-deductible. Traditional IRA's get a little sticky when it comes to withdrawal laws. If you do not withdraw before the age of 70½, then half of the mandatory withdrawal amount will be confiscated.


Roth IRA: Unlike a Traditional IRA, contributions to a Roth IRA are not tax-deductible. However, the earnings accumulated by a Roth IRA are tax-free. The Roth IRA is often preferable for people in a slightly higher tax bracket, as its earnings are tax-free. Roth IRA's also have none of the bizarre withdrawal mandates.

So which one is best? Well, neither is the absolute best. Different IRA's are better for different people. If you are completely lost and have no idea, check out IRA.com or even Wikipedia for more information. It may also be good to talk with a financial adviser whom you can describe your particular circumstances to.

"To heck with it," you say, "it's all too complicated and I don't even care that much." Well we both know that's not true. Saving for retirement is extremely important if you want to be able to... buy stuff... after you retire.