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What an IRA Is

IRA stands for Individual Retirement Account. There are different types of IRA accounts, but at their most basic level, all IRAs are accounts set up at a financial institution (like your credit union) or through a brokerage that allows you to save for retirement with tax-free growth or on a tax-deferred basis. An IRA is a good option to save and invest more for retirement when you’ve maxed out a 401(k) or other retirement account contributions.

With an IRA, you can invest in stocks, bonds, and other assets, or you can open one at a credit union with a Share or Certificate of Deposit savings account. Stocks and bonds are ideal for long-term goals because of their higher returns. But higher return savings like those offered at credit unions offer a balance of security and some growth and can be held in conjuncture with an IRA comprised of stock and bond investments.

Types of IRAs

All IRAs offer tax benefits that reward you for putting money into them; however, they differ in ways like when they save you money in taxes and how they grow money in the account.

Traditional IRA — Individuals contribute to a traditional IRA. If you qualify (there are limitations and maximum contribution levels), the contributions you make to the account will be subtracted from your income, thus reducing your income tax liability. So you reduce your tax bill the years you make contributions. You won’t owe income tax on the money until you withdraw it in retirement. This is called “tax-deferred growth.” This can be a good option for someone who doesn’t have a retirement plan at work. It also makes sense for someone who expects to pay a lower tax rate in retirement to delay and lessen the tax bill with a traditional IRA.

Roth IRA — A Roth IRA’s contributions are not tax-deductible, but the money grows tax-free. You don’t owe taxes on the investment gains or initial contributions in your account, and you can withdraw money tax-free in retirement. Another perk is being able to withdraw money at any time without penalty, but there are rules about early withdrawals, so check current tax laws regarding Roth IRAs before doing so.
You can open a Roth IRA at many credit unions. They usually charge lower opening and service fees and the opening deposit requirements are low.

Self-directed IRA — This option is for do-it-yourself investors who want more involvement and control over their mix of investments.

SEP IRAs and SIMPLE IRAs — These are for self-employed people and small-business owners. Like a traditional IRA, an SEP IRA offers a tax deduction on contributions, tax-deferred savings, and withdrawals in retirement are taxed at regular income tax rates.

Other IRAs include Backdoor Roth IRAs, Spousal IRAs, and Inherited IRAs. If you want to know if you qualify for one of these, speak to a financial planner.

Many financial experts suggest investing in an IRA account in addition to an employer-sponsored savings plan, such as a 401(k). This will supplement your current savings and future retirement income. You may also gain access to a wider range of investment choices with an IRA.


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