If you are just starting out in the workforce, you may not be too concerned with saving for retirement, but the fact is when you are just beginning is the perfect time to start saving -- and an employer-provided IRA is a nice option to have. As someone with little experience with retirement savings, it is likely that you have a few questions. Here are a few of the most common questions about IRAs and the answers you should know to help you get started.
What exactly is an IRA?
An IRA is an individual retirement account that is used to save money towards a future retirement. While 401k holdings are often subject to taxes, IRAs are not to an extent, which means the money that you place in these accounts cannot be taxed as your income. However, if you rollover funds from one IRA to another, you may have to pay penalty taxes on the amount of funds that you move.
What are the different kinds of IRAs?
There are several different types of IRAs, each with its own unique set of benefits. A few of the most popular IRAs offered by employers include:
Traditional IRA - The traditional IRA is the most basic tier of retirement savings accounts. You will not pay taxes on the funds that you contribute to the account through the year, but will be taxed when the money is withdrawn after retirement.
SIMPLE IRA - The SIMPLE IRA is an account that is often offered by employers with an incentive of matched funding. Although still an IRA, this account is often treated differently as administration over the account is not as expensive and funded by more than one party.
Roth IRA - Unlike other IRAs, the Roth IRA does not have penalties on withdrawals or rollovers, which means that you can take money from this account even before retirement age. The same deposit limitations apply with the Roth IRA.
What is the total maximum amount you can contribute to an IRA for savings?
The federal government does regulate how much money you can contribute to an IRA to deter those who try to place income in an IRA to avoid taxes. For tax years 2014 and 2015, the total amount of income that could be dedicated to an IRA was $5,500 and $6,500 for a person who is over the age of 50. This limitation still stands even if you have more than one IRA that you use for retirement savings.
When you take a little time to understand IRAs, it is easy to see why this type of retirement savings is a logical solution for an employee. For more information about IRAs and IRA rollover, talk to your employer or a financial advisor at a company like Wells Fargo Advisors Financial Network, for details.