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 Investing :  IRA

The Basics of IRAs

IRA
The Basics of IRAs

An Individual Retirement Account (IRA) is one of the most common types of personal retirement plans. The government designed IRAs back in 1981 as an incentive to help encourage individuals to save for retirement. By 1987, IRAs had lost their simplicity as "tax shelters". Lawmakers added restrictions that eliminated deductions for many taxpayers. Only three years ago, Congress wielded it's heavy hand again -- this time creating a new type of super-IRA that offers greater benefits than previous versions.

The Basics

IRAs are not actually investments -- they are really just protective shells that shield your money from the IRS. The tax code specifies how each type of IRA should be treated. You specify what type of investments belong in the shell. IRAs are known as defined contribution plans. You know exactly how much you've put into the plan, but you never really know what it will be worth down the road.

The concept of an IRA is relatively simple. You contribute up to $2,000 a year into an IRA account. Earnings that result from your investments will not only be reinvested but will also grow tax-deferred until withdrawal (tax-free for Roth IRAs). This tax-deferred status means your money will compound at a faster rate over the years resulting in a greater payout. The power of a IRA tax shelter will put you well ahead of a non-IRA type of account.

Types of Investments

You can put just about any type of investment you want into an IRA -- stocks, bonds, mutual funds, cash, CDs, zero-coupon bonds, U.S. Treasuries, annuities and even gold or silver coins (certain conditions apply) -- the typical kinds of investments you would find outside an IRA account. Investments that don't qualify for an IRA include collectibles, art, jewelry, real estate, or derivatives such as options or futures.

You are allowed to open more than one IRA account so long as the total amount you've contributed for the year doesn't exceed $2,000. IRA custodians charge annual maintenance and administrative fees for each account you have, so keeping multiple IRAs open is probably not a wise financial decision.

Qualified Custodians:

  • Banks, Credit Unions, Savings and Loans

  • Mutual Fund companies

  • Insurance companies

  • Brokerage Firms - self directed accounts that allow you to pick among a number of investments.


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