IRA stands for individual retirement account. Account users use this account for saving for the future years. These accounts are provided by financial institutions that provide tax advantage for retirement savings. It is usually more prevalent in US. IRA is investment account where customers can invest in stocks, bonds and mutual funds.
IRAs are different from 401(k) s as the former needs to be opened by the customer while later are provided by the employer or company. Self-employed individuals and small business owners can also take the advantage of these accounts. Most IRAs allows the user to mix and match their choice of investment options like stocks, bonds, deposits, mutual funds, exchange traded funds or just a single fund option.
There are 4 different types of IRA provided by the financial institutes. Eligibility is the key criteria in deciding the suitability of the account. The different IRAs available are as follows:
- Traditional IRA: It is a tax deferred retirement saving account. Taxes are paid only when withdrawals are done in retirement. Deferring taxes imply that capital can be compounded without taxes being deducted which make it more profitable than classic saving account It comes in 2 forms: deductible and non-deductible.
- Roth IRAs: In these accounts, taxes are already paid on the money which is being invested. No taxes need to be paid while withdrawing in retirement.
- SEP IRAs: It is a traditional IRA for the self-employed and small business owners. Any businessmen or anyone with freelance income can opt this account. It has a limit of 25% of income or 49000$ whichever is less.
- Simple IRAs: It is a type of traditional IRA for small businesses and self-employed individuals. The unique feature is that employer is required to make an equal contribution on the employee’s behalf. They have higher contribution limits than other accounts.
Almost every financial institution including bank, mutual fund companies and brokerage firms provide the service of IRA investments with a broad variety of options. Only major difference comes in the fee structure.