The word IRA is often brought up while discussing retirement plans and it’s probably safe to say most people have a general understanding of what it is. But just to be sure, let’s clarify. IRA stands for Individual Retirement Account and it is an investment account that invests in a wide range of financial assets. These include CDs, stocks, bonds, mutual funds, REITs, ETFs, annuities, and others. These assets comprise your investment portfolio, which may also consist of other assets, such as real estate and commodities.
With that being said, let’s explore the kinds of IRAs out there. Each one implies major tax implications, so it’s important to fully understand what’s at stake when choosing. We will begin with the Traditional IRA.
The Traditional IRA is a PRE-TAX retirement account. This means that any funds you put into a Traditional IRA can be deducted from your taxes for that year. For example, if you earn $70,000 a year and put $6,000 into a Traditional IRA, you only owe taxes on $64,000 dollars (barring other exemptions). Putting into this kind of retirement account can drop you down a tax bracket for that year. On the other hand, these funds are growing and the full portion will be taxed upon retirement. For example, if your traditional IRA grows into a respectable $600,000 upon retirement, you will pay whatever tax rate for that year on all that funds. If it’s, let’s say, 24%, you will lose $144,000 to Uncle Sam. But, perhaps you saved lots on taxes by being in a lower tax bracket those years you put into it.
These are not the only retirement plans available to you, but they are the most basic. We here at Walters Strategic Advisors can advise you on your best course of action and go into greater detail on both kinds of accounts. Feel free to make an appointment at either our Sarasota or Bradenton branches by clicking the button below and we look forward to helping you.