What Is an IRA?

Aim to be able to answer the "What is an IRA?" question if you want to retire comfortably.

May 18, 2014 at 11:30AM

While some financial experts are busy explaining how to invest in your IRA or whether you should convert your traditional IRA to a Roth IRA, many people are confused, because they're still wondering, "What is an IRA?"

Below are some simple answers to the "What is an IRA?" question.

For starters, an IRA is a tax-advantaged account that lets you save and invest for your retirement. There are two main types: the traditional IRA and the Roth IRA.

With a traditional IRA, you sock away money on a pre-tax basis, enjoying a tax break this year. For example, if you earn $50,000 and contribute $6,000 to a traditional IRA, that $6,000 is removed from your taxable earnings, leaving you with a smaller tax bill. If you're in a 25% tax bracket, you save $1,500 in taxes -- this year. Eventually, when you withdraw funds from the IRA in retirement, you'll be taxed on that money at your ordinary income tax rate, which might be lower then. (If you expect to be in a higher bracket in retirement, that's a good argument for a Roth IRA.)

A Roth IRA gives you no tax break now, but your earnings in it grow tax-free and all the money you withdraw from it later, if you follow the rules, will be tax-free!

There are other types of IRAs, too, for self-employed folks and owners of small businesses -- such as the SEP IRA and the SIMPLE IRA. Traditional and Roth IRAs have annual contribution limits of $5,500, plus an extra $1,000 for those 50 or older. SEP and SIMPLE IRAs have bigger limits.

Those are the basics about IRAs. There are more rules to them, though, such as that those in higher income brackets may not be permitted to make the full $5,500 or $6,500 contribution to a Roth IRA. Learn more before taking action. Once you're ready, you can compare IRA terms from some good brokers.

What's an IRA strategy?
Once you move beyond the "What is an IRA?" question, you might wonder, "What is an IRA strategy for me?" Learning more about IRAs will help you make the most of them. For example, if you're young, you might favor the Roth IRA. By starting young and making full contributions annually, you can build an IRA account worth hundreds of thousands of dollars -- or even a million or more by retirement -- and it will all be tax-free money.

Within a Roth, a good strategy is to invest in stocks that you expect will deliver above-average growth. A 10-bagger or 20-bagger will be much more powerful untaxed. 

Within a traditional IRA, dividend-paying stocks can be helpful if you don't want to have to sell off portions of your holdings in order to take the required minimum distributions in retirement. They could generate enough income for that. Dividends are also great for Roth IRAs, though, because you can ultimately collect them tax-free.

There's more to know as you answer the question, "What's an IRA?" But the bottom line is that an IRA can be a financial life-saver in this era of few pensions and great retirement uncertainty.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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