- What is IRA
- Types of IRA
- Are IRA and 401k the same?
Saving for retirement is a very important habit that you should start cultivating from the very beginning of your working life, and there are many saving tools for you to do this. Here is a brief approach to IRA and the different types.
What is IRA
IRA stands for Individual Retirement Account. These types of accounts are opened in a financial institution and have a tax-free growth or tax-deferred basis (this means that you will pay no taxes until you withdraw your money).
Types of IRA
The primary types of IRA go as follows:
- Traditional IRA – This type of account works as a tax-deductible contribution, and investment earnings are not taxed when inside the account. When you get to retirement, withdrawals will be taxed.
- Roth IRA- With this type of account your contributions won’t be tax-deductible but future withdrawals will be tax-free.
Are IRA and 401k the same?
No. Although both saving plans are aimed for retirement, 401k is an account that is provided by an employer and is classified as a defined contribution plan, which means that employees contribute a determined amount of money from their paycheck automatically. IRA is an account that is not related to any employer but is an independent savings account that you open by yourself.
IN A NUTSHELL
Saving for your retirement has plenty of benefits in order to take care of your finances, so an IRA is an excellent option for you to do. This type of account is not managed by your employer (like a 401k), but it typically allows lower contributions. When choosing a savings tool for your retirement, begin by doing a tax payment plan. This could help you determine, according to your income, which tool to use.