Why Invest in an IRA Account?

Definitions first – An Independent Retirement Account(IRA) is a tax-deferred retirement account that allows you to set aside a certain amount of money each year (up to $4,000 per year for those under 50 and $4,500 a year if over 50).

U.S. law allows working individuals to invest any amount up to $4,000 for 2007 and $5,000 for 2008 every year in a tax-deferred IRA account if the company they work for does not have a qualified retirement plan.

This can be an enormous tax advantage, and you should consider taking advantage of them.

Here are some of those advantages:

First, you may be able to deduct the amount from your taxable income and not have to pay income tax on that part of your earnings. You can do this every year that you invest in an IRA, until you are 70 years old.

Second, all traditional IRAs are tax deferred. This means that the profits, dividends, or interest you earn from the investments will never owe tax until you withdraw. These earnings compound tax-free for the many years until you retire and begin taking distributions.

Example - Let’s say you invested $4000 tax-free every year, earning and compounding at an average rate of 12%p per year – You would be worth a cool $965,321 after 30 years!

The IRA plans allow you to begin withdrawals (of course subject to regular income tax rates at the time of withdrawal) once you get to 501/2, but you must begin withdrawing by age 701/2. If you are disabled, you can withdraw early; otherwise early withdrawal is subject to a 10% penalty plus the regular income tax.

You can open an IRA account at any bank or stock brokerage firm. IRA accounts cannot be margined. Buying stocks on margin, to put it simply, is doubling your buying power buy borrowing up to 50% of a stock's price from your broker. (link to margin trading).

The most favored vehicles for investment of your IRA money have ben interest-bearing money market funds, savings accounts, certificates of deposits, mutual funds, or self-directed accounts in common stocks through a stock brokerage firm. However, fixed-income savings accounts and money market funds are not likely to provide the maximum hedge against inflation.

What are Keogh?

Keogh plans are similar to IRAs except they are only for self-employed workers. Keoghs, however, allow a higher maximum contribution: defined contribution Keogh’s a maximum limit of up to 20% of a person's annual salary or up to $30,000. Another form of a Keogh, known as a defined Benefit may allow even greater annual contributions.

Finally – the amount does not matter. If you only have $500 or $1000 to invest each year, that's okay – you have started the journey. There is no minimum dollar amount required to begin an IRA.

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