Starting an IRA is a simple task that can save you money in taxes and increase the funds you'll have available when you retire. IRA stands for Investment Retirement Account, and you can go online to open an account through a bank, brokerage, or mutual fund. There are two types of plans, a traditional IRA and a Roth IRA, each with advantages and disadvantages. They are similar to 401K plans, but different. Although penalties for early withdrawal have to be considered, there are advantages to opening an IRA account in which to put your savings.



To actually start an IRA, you have to first determine if you are eligible. Your annual income is one of the important factors. Then, you need to understand the differences in the two types of IRAs. Once you understand that, understand what your risk level is for investing.



Young people have a higher level of risk, because they can stand to lose money in an investment (more likely stocks) when they don't need as much income, and have so many years to earn more and reinvest. Older people, however, are approaching the time when they will need a fixed guaranteed income. They have a lower risk tolerance and must choose their investment instruments (more likely bonds or CDs) carefully. Finding an IRA manager, opening the account, and depositing initial funds are the next steps. This can often all be done at work, through your employer.

IRAs were set up by an act of Congress so that you could get tax breaks on money you were investing for retirement. You don't have to be employed to have an account, but employers often make matching contributions to your account. Both types of IRA allow investment in stocks, bonds, and certificates of deposits. Now, there are some differences. With the traditional IRA, taxes might not have to be paid when deposits are made to the account, depending on income. However, there is a 10% penalty if funds are withdrawn before the age of 59 1/2. Roth IRAs, on the other hand, require payment of taxes when the money is deposited. However, there is no penalty to early withdrawal of principal.

When it comes to tax differences, the traditional IRA allows you to deduct your contributions from your federal income taxes. But when the funds are disbursed to you, you'll have to pay taxes on whatever is withdrawn, including the principal and the interest. With the Roth, you don't get an income tax deduction. But you don't have to pay taxes when you withdraw the money, either, and you can withdraw it at any time, without penalty. There are differences between income limits on single and married people for both IRA types. There are exemptions to the penalties that you should look into if you need to make an early withdrawal.

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