What's the big deal with IRA's ?

Question

What's the benift of investing my money in an IRA?

Answer 1

It's all about taxes.

First, a simple IRA allows you to take a large tax deduction on your contributions, up to 4000 dollars for tax year 2006. For me, that's going to put about 800 dollars straight back into my pocket. A 20% return for doing almost nothing is GREAT.

Secondly, the money in your IRA grows tax free. If you sell a stock in your IRA for a capital gain, you owe no tax on it.

The downside is that withdrawls from IRAs are penalized if they aren't made according to the rules...generally you can only withdraw when you are retired, or to buy a first home.

Roth IRAs claim tax free withdrawls during retirement, but IMO I don't trust the government not to change the rules on that before I retire 40 years from now, so I take my deductions TODAY in a simple IRA.

Answer 2

Say you earn $100 and want to invest it in an index fund.

If you open that index fund in a regular account, here's the situation: really you can only invest about $75--because first you have to pay 25% income tax on your earnings. So you put $75 in the account and wait. Say it earns 10% over a year. Hooray! Now you have $82.5! Actually, you have to pay taxes on those earnings--to the tune of 15-30%, depending on how soon you sell. So you really only have $80.25. And every year its the same--as your money grows, you pay taxes on that growth. Then when you sell you pay more taxes.

If you open that index fund in an Traditional IRA or a 401k, you can invest the whole $100--automatically a 25% return on your investment, compared to the regular account! Then if it grows 10%, you get the whole gain--now you have $110. No taxes on any growth year in and year out. This means your investment can compound much more quickly. The only taxes you'll pay are when you withdraw the money--there's that 25% income tax again (unless your tax bracket has gone up or down).

If you put the index fund in a Roth IRA, you start out with that $75 again--but you dont' pay taxes on any growth over the years. AND you don't pay any taxes when you take the money out! So this account is even better than the other two if you think your tax bracket will be higher when you withdraw the money than when you put it in (keep in mind the govn might raise the tax brackets during our lifetimes!).

Check out some online charts about how much better your money grows in tax advantaged accounts like 401ks and IRAs.

Answer 3

If you invest in a standard IRA, the amount you invest is "tax-deductible" and you defer paying taxes on it until you withdraw the money when you retire. If you earn a LOT of money now, you are paying a high rate of tax on your income, so this will lower that. And, when you retire, you will probably be paying a much LOWER rate of tax, so the tax you pay on that money will be much less than if you paid that tax today. Just search on IRA benefits for sites that explain it all to you even better than this.

Answer 4

Tax benefits. You either get deductions now on a regular IRA or you get a nontaxable withdrawl at retirement with a Roth IRA. so if you are looking for a retirment plan, a Roth is a great place to start looking.

Answer 5

most people retire with not enough money, i know you're still young, selfish, and living in the moment, but you have to plan for your future. even with a limited monthly investment of $100, your ira will grow exponentially once it hits the 20+ year point...

Answer 6

I like IRAs simply because they help me keep a running tab on how much I've saved for retirement. Along with my 401(k), my IRA is sorta like my retirement scorecard.