Important Things about Individual Retirement Accounts

2007-03-08 10:33:40

( Health )



The Needs of Retirement

After having worked for almost half of your lifetime, you may have looked forward to your retirement years. At this moment of your life, you will be able to go on an extended vacation or do other activities that were not possible for you when you were still working.

However, retirement does come with a price, as you still need money to finance your trips or hobbies. Depending on your grown-up children for financial support is probably the worst alternative, as they would have problems of their own. You need a savings instrument that will assure you of a modest but steady source of funds to sustain yourself, at least for your most important needs.

If you're presently employed, your employer may have already opened a 401k plan to provide you with pension funds for your retirement. However, the amount that you and your employer contribute to this plan may be only minimal and may not be sufficient for your future needs. Some people buy individual insurance or individual stocks to supplement their 401k plans. Another option is to open an individual retirement account.

Basic Characteristics of Individual Retirement Accounts

The individual retirement account or IRA is an investment instrument to help you accumulate funds for your future retirement. The IRA is separate and independent from the 401k retirement or pension plan that your employer has established for you. Unlike the 401k plan which is mandatory for employers, the IRA is an individual voluntary arrangement you make with specific financial institutions to invest your excess into their stocks, bonds and other long-term instruments. Your IRA account is like an individual savings account, but you cannot withdraw from this account till you reach retirement age.

Furthermore, the voluntary arrangements you make for your IRA cash contributions are tax deductible. In contrast, your employer funds your 401k account by deducting a small portion of your salary and then matching it with an equivalent amount.

The amounts of cash you contribute to your individual retirement account are entirely up to you. Earnings under your IRA are tax free until you reach retirement age. Generally, you cannot withdraw funds from your IRA account before you reach retirement age, otherwise you will incur penalties. And in case you are filing for bankruptcy, you will be glad to know that your IRA account is exempt from creditors' claims.


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