IRAs are personal retirement plans where you can invest your money into and get a tax break for doing it. Once more you can postpone the taxes on the interest that you make off of your investments while they are in the plan. There are two major types of IRAs.
The first is called a traditional IRA. These work in a similar way to 401k plans (for more 401k information talk to your company's human resources department). You can write off any money that you invest into the IRA from your taxes.
For example, if you invest $3,000 into your IRA in a year that $3,000 is written off of your taxes. That money can then be invested into pretty much anything that you want it to be. Also because the interest you make off of the money is not taxed until you withdraw it your money will compound year after year. In the long run it will do a lot better than if it was being slowed down by Uncle Sam and his tax laws.
Now it is important to remember that you can't just cheat your way out of taxes with this method. You will still have to pay taxes once you take the money out. Luckily because you avoided the taxes on the interest and it has compounded so much you still come out way ahead.
Another alternative would be a Roth IRA. Roth IRAs follow all of the same basic IRA account rules. There is one major difference, however. With a Roth IRA you do not get a tax break when you invest the money, but you do get a tax break when you withdraw it as long as you follow the basic IRA withdrawal rules.
Which plan is better? This depends on your taxes. If you believe you will have to pay a higher tax rate in the future when you take the money out it would be better to get a Roth IRA so you can pay your taxes now while they are low.
If you believe that you will have to pay a lower tax rate when you take the money out it would be better to invest into a regular IRA.
The first is called a traditional IRA. These work in a similar way to 401k plans (for more 401k information talk to your company's human resources department). You can write off any money that you invest into the IRA from your taxes.
For example, if you invest $3,000 into your IRA in a year that $3,000 is written off of your taxes. That money can then be invested into pretty much anything that you want it to be. Also because the interest you make off of the money is not taxed until you withdraw it your money will compound year after year. In the long run it will do a lot better than if it was being slowed down by Uncle Sam and his tax laws.
Now it is important to remember that you can't just cheat your way out of taxes with this method. You will still have to pay taxes once you take the money out. Luckily because you avoided the taxes on the interest and it has compounded so much you still come out way ahead.
Another alternative would be a Roth IRA. Roth IRAs follow all of the same basic IRA account rules. There is one major difference, however. With a Roth IRA you do not get a tax break when you invest the money, but you do get a tax break when you withdraw it as long as you follow the basic IRA withdrawal rules.
Which plan is better? This depends on your taxes. If you believe you will have to pay a higher tax rate in the future when you take the money out it would be better to get a Roth IRA so you can pay your taxes now while they are low.
If you believe that you will have to pay a lower tax rate when you take the money out it would be better to invest into a regular IRA.
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