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Last Updated on: 11th March 2015, 05:18 pm
What is an IRA?
If you're an American citizen or resident, you probably heard the term IRA many times. An IRA is basically a savings plan for individuals. Many people use an Individual Retirement Account to supplement traditional forms of retirement savings. Most financial advisers recommend that a person open an Individual Retirement Account in order to supplement their future social security income.
What are the benefits of an IRA?
The main benefit of an IRA is that it has many tax advantages. There are two basic types of IRA: Traditional IRA and Roth IRA. Each has a slightly different tax structure. The basic difference between a Roth IRA and a Traditional IRA is found in how they are taxed.
A Roth IRA is not tax deductible. However, when you withdraw the funds from a Roth you do not have to pay tax on them. A traditional IRA is not taxed until you are ready to withdraw the funds at your retirement.
It should be noted that there are penalties if you plan on withdrawing your funds early. This is why many financial advisers suggest avoiding early withdrawals if possible.
What are the types of investments available for an IRA?
The most common investments found in Individual Retirement Accounts are stocks. Some people also invest in other financial instruments such as Bonds, CD’s, and Mutual Funds. There are also more esoteric investments such as Gold.
The person who is the most conservative will often put their money into a CD. A CD has a guaranteed rate of return. However, this is usually very low. The same can be said of Government Bonds. While your money is very safe, you are not going to dramatically improve your overall financial situation. This can be a problem if the economy begins to fall.
Many people buy stocks for their IRA. Stocks have a very good growth potential. Over time your initial investment may grow much larger. Of course, the opposite can also be true. This is the reason that it is wise to invest in many companies. This limits your exposure to risk. If one company fails, and you own stock in several companies, you will not lose everything you own.
Mutual Funds are a very popular investment choice. Investors like the fact that Mutual Funds allow you invest in many different companies with ease. A Mutual Fund is a group of many different companies. This limits your risk.
Some people want to invest in gold. There are several different ways to have gold investments in your IRA. A popular way is to buy an ETF that represents gold. An Exchange Traded Fund that owns gold is an easy way to invest in gold without actually owning the gold.
However, many people want to buy investment grade gold and not simply buy stock in a company that owns gold. If you want to own actual gold, then you will have to make sure you pick an IRA custodian that will facilitate this. Not all IRA custodians allow a client to own real gold. While the IRS allows for people to own investment grade gold, not all companies that manage Individual Retirement Accounts do. This is why you need to perform due diligence when selecting an IRA custodian.