Individual Retirement Accounts (IRA) tend to be a little more confusing than most accounts, but we will gladly walk you through the differences. EVERYONE should open an IRA account and start saving for retirement. An IRA is a personal savings plan that provides income tax advantages to individuals saving money for retirement purposes.
There are two main types of IRA’s; Traditional and Roth. With a Traditional IRA, you can contribute up to $5,000 per year. The advantage is whatever amount you deposit into your IRA account may be tax DEFERRED. Meaning you deduct that amount from your adjusted gross income. So really, you will not pay tax on that deposit…YET. Now when you start making withdrawals from your IRA account (and there are more rules about withdrawals), THEN you pay the tax. So, if you are working hard now and need a tax deduction, maybe traditional is better for you. And also keep in mind, that when you are retired, your income will drop and maybe paying the tax then makes more sense.
A ROTH IRA works just the opposite way. The money is NOT tax deductible now, but the interest you earn is, and the withdrawals you make are also tax free. As a result, you pay the tax now.
An EDUCATION IRA is where you can put away up to $2,000 per year for education, but this plan is restrictive.
With all of these products, please consult your tax advisor.