A Blue Zest

Planning for retirement is very important, and if you use an individual retirement account, also simply called an IRA, you can save money in an efficient, smart way.  Individual retirement accounts have a lot of great benefits that make them popular vehicles for retirement saving.

By using an individual retirement account, you essentially pool the money you have to invest with funds from other investors, boosting your retirement savings. Depending on your particular individual retirement account, you may have several mutual fund options from which to choose investments.

The first thing to understand is that there are several types of individual retirement accounts, with the most common being the Roth IRA and traditional IRA.  Though other types exist, when financial planners and novice investors discuss IRAs, they are usually referring to either the Roth or traditional form.

It is also important to know that the amount you contribute to a traditional individual retirement account is subtracted from your taxable income, reducing income tax liability. This is great news while you are working and saving for retirement.  Withdrawals from your individual retirement account, however, are subject to income taxes and a ten percent penalty if you withdraw funds before you are 59 years old.  There are a few exceptions to that rule, but only for extreme hardship.

Roth IRAs, on the other hand, are not tax-deductible.  However, they are more flexible than traditional individual retirement accounts and allow for withdrawals, after five years, without taxation or penalties, as long as you meet certain requirements.

In addition, individual retirement accounts treat all earnings in the same manner.  This means that capital gains, interest, and dividends are all handled the same way. With an IRA mutual fund, you have the option of having monthly contributions automatically withdrawn from your bank account, which can make saving and investing for retirement easier.

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