What Is An Individual Retirement Account?


Lets get back to basics. What is an Individual Retirement Account?

We thought we’d just spend a moment explaining Individual Retirement Accounts, as we had someone ask us what they were. We assumed that everyone was familiar with Individual Retirement Accounts, but perhaps not.

Individual Retirement Accounts, (otherwise known as an IRA), are a vehicle for planning and investing for your retirement. They were set up originally in 1974, however in 1981 the government granted a particularly favorable tax status to Individual Retirement Accounts, and they became extremely popular.

Traditional IRAs, (as opposed to Roth IRAs), are tax advantaged by allowing funds put into Individual Retirement Account to be tax deductible and income earned by investments throughout the lifetime of the IRA to be earned tax free.

That doesn’t mean that no tax is ever paid on the income and capital gains earned by an IRA, it’s just that the tax is deferred. As for many retirement plans, the tax is deferred until the money is taken out of the fund and it is taxed as ordinary income.

A Roth IRA, on the other hand, uses after tax money, (ie money on which tax has already been paid), and then there is no tax when the funds are taken out.

There are good reasons to have an IRA. Specifically your Individual Retirement Account can accumulate profits from investing without the necessity to realize some of the investments to pay income tax or capital gains tax.

Therefore the power of compounding works in your favor with all profits retained in the trust so that everything can be reinvested.

Many investors prefer to use a Roth IRA, so that they pay tax at the start, but so that all accumulated profits can be kept in the trust to harness the power of compounding, and no tax is attracted at the time the money is taken out.

So if you’re thinking of doing some planning for your retirement setting up an IRA can be one of the single best things you can do. Make it a self directed Individual Retirement Account, (or self managed Individual Retirement Account, same thing) because if you do it right that should allow you to invest your IRA in real estate. And that’s the single best investment for an IRA.

And when you get to retirement you’ll be very glad you made the effort now.