?Benefits of Having an IRA

by William Blake

The amount of debt you carry will adversely affect the amount of money are able to save. When you are buried in debt you are making payments to interest that could be going toward your savings. You could be gaining interest on savings rather than paying it out on debts owed.

If you think of saving money to buy the things you want rather than using credit cards you can save a lot of money each month. But it is up to you. How important is it to have what you want right away, versus not having to pay high interest charges?

The bigger concern is not the purchase of isolated things, but the matter of saving for your future. An IRA (Individual Retirement Account) will help you put away money for your future. What are the negatives and positives of this?

When you save that money, obviously, you are not spending it. You accumulate interest on that money saved, which compounds over time. See one of the many online calculators to get a feel for how compounding can help, for example, turn a few thousand into many thousands over 30 years. You also get a tax benefit, since by design any money put into the account represents a tax deduction.

Instead, you are taxed on that money when you begin to use it many years later. The theory is that you will then be at a much lower tax rate and therefore pay a much smaller amount than you would when it was first earned. Sometimes that theory is true in practice, and in some smaller number of cases it’s not. You will need to make some predictions for your own case, but for most people it’s true.

There are many IRA options available today and the system has evolved a bit in recent years. But the basic principle is the same ??” up to $2,000 per year deposited into an account tax free.

One variation, for example, is the popular Roth IRA. Federal regulations allow tax-free withdrawals as long as the contributions remain in the account for five years and you are at least 59, or it’s used for a first-time home purchase.

Another common savings instrument is the 401k, named after a provision in the 1978 Internal Revenue Code. These allow employers to put money that is tax-deferred into an account on the employees behalf. You pay no income tax on the money until it is withdrawn.

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