IRAs stand for Individual Retirement Accounts. They are plans which you can set up through a financial firm that allow you to invest for retirement and avoid paying additional taxes. There are two kinds of IRAs.
The first is called a traditional IRA. These work in a similar way to 401k plans (for more 401k information talk to your company's human resources department). You can write off any money that you invest into the IRA from your taxes.
For instance, if you invest $5,000 into your IRA that year you can write off $5,000 in your taxes. Also, the money can be invested into nearly anything that you want. The interest that the money makes is not taxed while it is in the account. This allows the money to compound until year after year without having to be slowed down by taxes.
Now it is important to remember that you can't just cheat your way out of taxes with this method. You will still have to pay taxes once you take the money out. Luckily because you avoided the taxes on the interest and it has compounded so much you still come out way ahead.
Another alternative would be a Roth IRA. Roth IRAs follow all of the same basic IRA account rules. There is one major difference, however. With a Roth IRA you do not get a tax break when you invest the money, but you do get a tax break when you withdraw it as long as you follow the basic IRA withdrawal rules.
So what makes a better investment? Well this depends on you. If you think that your tax rate will be higher in the future for whatever reason then a Roth IRA would work better because it allows you to pay your taxes now while they are low.
Now if, on the other hand you think your tax rate will be lower in the future it would be better to invest into a regular IRA plan and postpone your taxes until you can pay them at a lower rate.
The first is called a traditional IRA. These work in a similar way to 401k plans (for more 401k information talk to your company's human resources department). You can write off any money that you invest into the IRA from your taxes.
For instance, if you invest $5,000 into your IRA that year you can write off $5,000 in your taxes. Also, the money can be invested into nearly anything that you want. The interest that the money makes is not taxed while it is in the account. This allows the money to compound until year after year without having to be slowed down by taxes.
Now it is important to remember that you can't just cheat your way out of taxes with this method. You will still have to pay taxes once you take the money out. Luckily because you avoided the taxes on the interest and it has compounded so much you still come out way ahead.
Another alternative would be a Roth IRA. Roth IRAs follow all of the same basic IRA account rules. There is one major difference, however. With a Roth IRA you do not get a tax break when you invest the money, but you do get a tax break when you withdraw it as long as you follow the basic IRA withdrawal rules.
So what makes a better investment? Well this depends on you. If you think that your tax rate will be higher in the future for whatever reason then a Roth IRA would work better because it allows you to pay your taxes now while they are low.
Now if, on the other hand you think your tax rate will be lower in the future it would be better to invest into a regular IRA plan and postpone your taxes until you can pay them at a lower rate.
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