What Is An Ira?
IRA's are easy and useful. Here's how to use one
Lately the buzz around town has been all about money matters and where to invest! Bull market here, bear market there, internet stocks here, biotech stocks there. And in the middle of all this we have forgotten the basic tools that have been here forever and that have provided us with great opportunities long before internet stocks! The reality is that most of us have neither the experience nor the risk tolerance to jump in those high flying stocks! That's why I will focus my article on IRAs.
IRAs are one of the most useful investment tools that one can ever have. Indeed, if you are able to save a couple hundred dollars a year (most of us can do that!) then you simply should have an IRA! They require almost no knowledge of finance or investment techniques at all and yet they are a great way of saving up for retirement while taking advantage of high interest rates and tax deductions!
IRAs work very much like deposit accounts with high interest rates, and the choice of where you want your money to be invested! Most importantly, IRAs also allow you to take tax deductions for your contributions. You open an account and every year you deposit up to a maximum of $2000 in it (no minimum!) at a return rate in the range of 8% and higher. The money that you deposit in such an account is deducted from your yearly income taxes and you will only pay taxes when you withdraw your savings at the time of retirement depending on the type of IRA that you have opened!
Now lets get to the best part: making money!!!!
The way in which IRAs make money is simply by using the compounding of interest. Once your money is put in an account it earns interest and/or capital gains if it is invested in stocks or funds (remember! you choose where your money is invested!), and by keeping it in the account for a long time, while regularly adding to it you will be earning more and more interest money. The initial deposit earns interest, the yearly contribution earns interest and finally, even your interest earns some more interest. Over a number of years and at a high interest rate such as the ones on IRAs this simply accumulate to great returns on such a little, non risky, yearly investment. And remember that you are deferring your tax payments all the way until you retire!
With social security being almost non existent by the time we get to retirement age, it would be simply foolish not to start saving and preparing ourselves for our retirement years!!!!
** Here is a simplified example (with no withdrawal tax consideration)
You start today with a new IRA. Assuming that you are 25 years old and you will contribute $1000 for 40 years to your account until your retirement at age 65.
>>>>> By putting this money in a regular non-IRA savings account at about a 2% interest rate, you would have accumulated a total of $61,610 by retirement age. ($1000*40 = 40000 plus the interest paid)
>>>>> By putting the same money in an IRA at a 9% (return rate), you would have accumulated a total of $368,292 !!!!!!!!!! a difference of $306,682 versus regular savings!! This is an amazing difference especially considering that we are only contributing half of the allowable contribution!!!
Now that you have seen the incredible amount of money that can be accumulated just one little step at the time with IRAs, let me tell you how to get started with one. IRAs are offered by most banks, financial institutions, employers and even online brokers. Before you open an account, it is very important to shop around for the one that will yield the best return on your money. Indeed, when researching IRAs you must make sure that you are getting the highest interest rate possible as this is very important in the long run!! Furthermore, you should pay particular attention to the maintenance fees, the early withdrawal fees and all those other annoying fees that banks charge. The good news is that with so many choices out there you are bound to find one that fits your needs and requirements. But remember you should leave your money in the account until retirement or you will be charged penalties for early withdrawals!!
Finally, I would like to point out that there are many different types of IRA such as Roth IRA or Rollover IRA all with very different tax considerations. In order to keep this article as simple as possible (and not bore you!!), I chose not to compare all of them. But you must make sure to review all the information before starting any account.