What is an Individual Retirement Account (IRA)?
A Traditional IRA allows you to contribute up to $4,000 (for 2007) into a tax-deferred account and deduct your contribution from your current income taxes in many cases. IRAs are getting better because the tax bill passed in the spring of 2001 increases the limits on contributions to $5,000 in 2008, and will be adjusted for inflation thereafter. Taxpayers age 50 and over have a special catch-up period that allows them to add another $1,000 per year. Your contributions and earnings grow tax-deferred until you begin withdrawals – usually not before age 59½. Withdrawals are taxed as ordinary income in the year they are taken out of the account. In most cases, the IRS treats withdrawals before the age of 59½ as ordinary income and imposes a 10 percent penalty on top of that. Here are some additional features of traditional IRAs: * You can make an early withdrawal (before age 59½) if you use the money for the purchase of a first home or to cover college costs. * You must begin taking distri
IRAs were created to enable and encourage individuals to save for their retirement. The main incentive for opening an IRA is that an IRA offer tax advantages over a typical investment account. Most importantly, contributions to Traditional IRAs are generally tax deductible in the current year and any taxes related to gains on the investments are not paid until you withdraw money from the account. In most cases you can begin withdrawing the money at age 59½ without paying a penalty. However, there are some circumstances under which the money can be withdrawn earlier without having to pay a penalty.
