Retirement is something that most people know they need to focus on at some point in their lives, yet many get so overwhelmed by it that they don’t take the time to do so. Learning the ins and outs of retirement can be a long, frustrating experience, but just knowing that you’re saving towards the future can bring peace of mind. One of the most convoluted aspects of retirement is sorting out the differences between IRAs.
IRA stands for “Individual Retirement Account,” and can basically be viewed as a savings and investment account that comes along with a variety of tax breaks. There are 11 different types of IRAs to choose from, however, some of which may apply to your situation and some of which likely will not. Rather than allowing yourself to get fully overwhelmed, it’s best to start with three of the most common types of IRAs and move on from there.
A basic Individual Retirement Account is one of the most common of the 11 varieties. It is typically a traditional or Roth IRA that is established with a financial institution – usually a bank, but sometimes a broker or mutual fund. This type of IRA allows for contributions into a variety of different securities, including stocks, CDs, bonds and more. It differs from an Individual Retirement Annuity in that the latter is typically set up through a life insurance company and an annuity contract is written up. The third type of IRA in this category is often referred to as a Group IRA, which is a basic IRA that is set-up by a union or employer.
Given it’s name, it would seem as if a SIMPLE IRA would be relatively straightforward, but it’s actually one of the more confusing options for many people. Typically, this is an IRA that is set-up by your employer, who will match the amount of money that you contribute each year. What confuses many people are the limits that are often set regarding how much money one can actually place in the IRA annually. The number starts off at a baseline and increases each year that you stay with the company, which serves as a beneficial factor for both employers and employees. If you’re able to contribute a fair amount of money each year, this is one of the best ways to build a retirement fund.
Spousal IRAs are another popular variety and can be utilized to your family’s advantage. This type of IRA is funded by a married individual in his or her spouse’s name, so long as the spouse brings in under $2,000 in annual income. Sticking with this number, the married individual can contribute up to $2,000 for both their Spousal IRA and Individual IRA, which means you can build security for your spouse without having to sacrifice your own retirement plan. Note that couples must file a joint tax return in the same year that a Spousal IRA is set up in order for it to be legally on the books.
The world of IRAs can certainly be confusing, but its an investment that can do a great deal for your future if you take the time to determine which one is right for you and your family.