IRA

An IRA is an Individual Retirement Fund. The goal of an IRA is to save tax free or tax deferred dollars until you reach retirement age. There a a lot of different types of IRA’s, but a standard IRA works like this. You are allowed to contribute as often as you’d like up to $4000 per year, and it will be tax deferred meaning that it will not be hit with income tax until it is withdrawn from the account. After 50 years of age you are allowed to contribute more to your IRA and as long as you wait until you are 59 1/2 years old, you can withdraw the funds with no penaties. The funds are invested by the financial institution you choose to manage your IRA and thus gain you interest while it is in the account. If you withdraw the funds before 59 1/2 you will be hit with income tax and also a 10% penalty fee. The reason for this penalty is to strongly discourage early withdrawls and encourage everyone to save for their retirement. Some people who retire from a company that offers a 401K plan choose to do a 401K rollover to IRA. I will discuss the details of this move and why it is beneficial in my next post.