IRA

The individual retirement arrangement or an IRA account is one of the main retirement saving options in addition to retirement accounts like 403(b) and 401(k). However, dissimilar to any retirement savings schemes provided by the employer, an IRA has to be handled by the individual himself.

How do IRA accounts work?

Some of the common types of IRA accounts are traditional IRA, simple IRA, Roth IRA, and SEP IRA, etc.

The most widely used type of IRA is the traditional IRA. As of 2017, individuals can put in a combined $5,500 ($6,500 for individuals aged 50 years or more) in Roth and traditional IRA accounts. The full amount, i.e., $5,500/$6,500, is eligible for tax deduction every year. Thus, it can result in significant tax savings, especially for those in the 25 percent tax slab.

It is however important to note that once the money is contributed to traditional IRA account, it cannot be taken out before the individual reaches the age of 59 years and 6 months; else the individual will be levied considerable taxes and fees. Additionally, when the total money in IRA account is withdrawn during retirement, it is subject to taxation just like salary.

IRA accounts are options of investment where you contribute money. The individual then has to make the choice of where that money is invested. Certain investments are unpredictable but offer greater returns. However, most IRA investors tend to invest in more conservative investment instruments.

IRA CDs and IRA savings accounts are two of the most conservative kind of IRA options of investment. They function just like the normal CDs and savings accounts, but get funded via the IRA account. It is simple to open these conservative IRA accounts at any bank or credit union. The returns on IRA CDs and savings accounts are not that high, just like market oriented CDs and savings accounts. This is due to the fact that the returns are earned only via interest on the CDs and savings, unlike returns from investments in other instruments like property or stocks.

IRA CDs and savings accounts carry less risk and hence are preferred by conservative investors who are risk-averse and unwilling to put their hard-earned money into volatile instruments like stocks. However, financial advisors do not suggest investing a lot of money in these accounts due to the low yield. This is because the value of cash tends to decrease over time due to inflation.

Investment advisors typically suggest investing in IRA CDs and savings accounts for the short term and placing the bulk of the IRA account cash in high yielding instruments like stocks, etc. Those who do not want to deal in shares can continue investing in IRA CDs and savings accounts for the long term as well.

Investing in stocks is an easy and simple process. Individuals only have to visit a brokerage firm and start a brokerage account. After that select the type of IRA account that you want to open and then select the stocks that you want to invest in. The same brokerage account can be used for investment in bonds as well. Bonds do not offer as much returns as stocks, but they are less risky and provide better yield than CDs and savings accounts.