Individual Retirement Accounts (IRAs) have become an important part of the retirement plans for millions of Americans. IRAs allow you to build a nest egg for retirement while receiving tax incentives at the same time. The tax incentive could come while you are making annual deposits to your IRA or when you begin to withdraw the money, depending on the type of IRA you choose.
Tax Advantages
One of the best reasons to open an IRA is that you can increase your net worth and receive a tax break while doing so. With a traditional IRA, you are allowed to deduct your annual contributions, depending on your income, and if you are enrolled in a retirement plan through your employer. For 2010, the deduction limits are $66,000 for single income tax filers and $109,000 for married individuals who file a joint return and participate in an employer-sponsored retirement plan. There is no income limit for single filers who are not in a work retirement plan or married couples filing joint returns who can make up to $176,000 before contributions are not tax deductible. You will pay tax when you begin to withdraw the money, however.
With a Roth IRA, your annual contributions are not tax deductible, but you will not be taxed when you withdraw the money.
Retirement Income
With the average Social Security check weighing in at just more than $1,000 per month, many people find that Social Security benefits alone will not support them. Having an IRA will guarantee that you have more money available during your retirement years as well as help alleviate any concern you might have about the future stability of Social Security.
Easier Saving
Another reason why IRAs are good ideas is that many people find the thought of having easily accessible money on hand too tempting to pass up and they will spend it. While the money in an IRA can be accessed at any time, you will be penalized 10 percent for making an early withdraw before the age of 59 1/2. If the money is in a traditional IRA, it also will be taxed at your current tax rate, which could well be enough of a deterrent for people tempted to get their hands on the cash.
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