Individual retirement accounts (IRAs) provide tax incentives to put money away for retirement savings. Two types of accounts are Traditional IRAs and Roth IRAs.
You contributions to a traditional IRA help lower your taxable base by providing tax credits for the money you save for retirement. The earnings from the traditional IRA are not taxed until the money is distributed to you. Although IRAs cannot be owned jointly, any unclaimed amounts can be paid to beneficiaries upon your death.
Early withdrawal (before you reach age 59½) from an IRA has a brutal penalty of 10% for taxpayers who elect to take an early distribution. It’s generally not a good idea to touch the money that you have put in your traditional IRA unless you have few or no other options.
A Roth IRA is an individual retirement account that enables individuals to set aside after-tax income up to a specified amount each year. Contributions to a Roth IRA are not tax deductible. However, both the earnings on the account and withdrawals after age 59½ are tax-free. Thus, the tax benefit comes to you later, rather than sooner. Additionally, because the money you put away in Roth IRA has not been deducted, you are able to tap your contributions — but not their earnings – without penalty.
There are a number of different types of IRAs, which you can set up with your financial advisor or your bank.