Have You Heard About Something Called ‘IRA?’

This century of information overload definitely cannot be blamed for the unawareness among mass about imperative fields. Many people especially youths of our nation seems to be quite ignorant about finance related facts and issues. Why should they? They are just out of college with those gigantic glasses and torn jeans, nothing to do with something called ‘Economy’ or ‘Gross National Product.’ And seriously I don’t expect them to talk about these things so soon in life.

However, finance is not about just GDP and economy. It involves something that is very much personal and essential stuff called ‘Personal Finance.’ Though it involves many significant categories like debts, savings, investments, etc., there is something that youths are totally unaware about. It’s called IRA. Ok, you have heard about IRA and know it is related to retirement. That’s it?

I am repeatedly targeting the youths because of three reasons. First, few among them knows about benefits of IRA (many don’t know what it is). Second, they fall under the age group that represents our country’s future. Third: they don’t really want to know about something that is quite boring and information on which requires searching many websites.

Now you know that I don’t have anything in particular against youths, let’s start the session.

I have made the explanation of IRA a bit precise and concise (in 6 points) so that they don’t run away before knowing much about it.

1. An IRA or Individual Retirement Account helps you to gain enormous tax benefits if it is used to save funds for your retirement.
2. It is NOT an investment. It is an ACCOUNT (like your any other account) which stores your investments. These investments can include anything like mutual funds, CDs, stocks, etc.
3. It is quite easy to open an IRA. You can go to any brokerage companies like Edward Jones, Merrill Lynch, etc. Or open it online through brokers like ETrade or Scottrade. Mutual fund companies like Vanguard and many others also offer such accounts. If you don’t have any of these companies nearby, visit any bank.
4. You have the freedom to select the investments that will be in your IRA. Some banks would not allow you to invest in mutual funds and stocks. But I said ‘some’ banks, not all. Many major ones do allow you to do so. So, in the end, it’s you who have to decide the account holdings.
5. You have the right to open more than one IRA. Yes, you can do this. But there is a limit set by IRS on how much you can save in an IRA every year. The limit for 2009 is $5000 for people below the age of 50 and $6000 for 50 and above. Hey, not on every account. You may open 39 IRA’s if you wish. But the combined investment should not exceed the limit mentioned above. However, I know you wouldn’t open more than one because…
6. You have to pay an annual charge of $30 – $40 each IRA to the respective mutual fund company or the bank.

Now that it’s clear what an IRA is, let us try to see what the types of IRA are and which one is beneficial for everyone, including youths.

The two most common types are Roth IRA and Traditional IRA.

Roth IRA

Tax benefit is an essential component of any IRA. But this one has some additional benefit. The investments under Roth IRA are purchased from the funds that is already been taxed. So the benefit is that you don’t have to pay any tax when you withdraw investment during your retirement.

Traditional IRA

There is an up-front deduction in tax when you have a traditional IRA. However, you are liable to pay taxes on every withdrawal during retirement.

According to me, Roth IRA is far better than the traditional one because it suits my needs. That doesn’t mean that it will work better for you as well. If you really want to open an IRA, there is much to learn about both the types. Type Roth IRA or Traditional IRA in your search engine and get details about both before opening an account.

Then why don’t I post it for you? Because I want you to learn more about finance at this age as I am doing. Yes, I am just 27. So, why such battering and abhorrence against youths? Nothing personal, it’s just that we, as youths, focus on much less important things than the ones that really matters. Ok, I don’t want to start again. Good luck with your selection with IRA and comment if you want to say something against me, or youths, or ignorance, or retired people, or anything else.