Providing a person has the income to do so, any working adult has the right to open an individual retirement account, such as a traditional IRA, with a custodian institution such as a bank. The custodian will have individual rules as to how money in the IRA is invested, such as into stocks and bonds or mutual funds. The contributions to the IRA are tax deductible, though there are several eligibility requirements based on income, filing status, and availability of employer provided retirement plans.
Many people think that making tax deductible contributions is a benefit of putting money into an IRA, but in reality it is not. The unpaid taxes are essentially a government loan that must be repaid whenever the money is withdrawn from the account. So while the account will grow due to the investments, the debt will also grow at the same rate, so it is really just deferring payment, not saving any money. In reality, the tax must be made as soon as funds are withdrawn, which means there is a strong disincentive for early withdrawals. A gold ira is also a great investment option.
In addition, there are eligibility requirements that one must meet in order to qualify for the tax benefits. Depending on employer based retirement plan eligibility, one’s income must be below a specific threshold for filing. If one’s income is that low, it makes more sense to just pay the taxes at the present than to defer them to an IRA.
Any withdrawals from the IRA at any time are included in gross income and subject to federal income tax as a repayment of the original tax on employment income that was deferred in the year the money was contributed. This can make IRAs hard to use if you need the money for an emergency, as taxes and penalties must be paid in cash before any of the money in the account can be used, which can really make a dent in the funds.
Also, withdrawals are required to begin by age 70.5 according to a certain formula. If the owner does not make the required withdrawals, he will be subject to penalty of 50% of the mandatory withdrawal amount that will be confiscated by the IRS. There is also a 10% early distribution penalty if the owner makes a withdrawal when he is under the age of 59.5, but this can be waived for a few exceptions. You do need to factor in the advantages of a traditional IRA, as well, when making your decision.