Individual retirement accounts aren't the only way you can save for retirement, but IRAs have advantages over regular savings accounts and other investment vehicles.
In this installment of Industry Focus, Motley Fool analyst Gaby Lapera and Director of Investment Planning Dan Caplinger discuss why IRAs are often the best option available to save for retirement. As Dan and Gaby talk about in this clip, IRAs offer the opportunity to grow your savings on a tax-deferred basis, meaning that you don't have to worry about paying taxes on the income and capital gains that your investments generate over time. Instead, any tax that's due is owed only when you take money out of the IRA, and with some types of accounts, any gains are actually tax-free.
A transcript follows the video.
This podcast was recorded on Jun. 6, 2016.
Gaby Lapera: People might be wondering if they, for whatever reason, have never heard of an IRA -- what's a difference between an IRA and a regular savings account? Why would you want an IRA versus just keeping your money in the bank?
Dan Caplinger: The biggest advantage that an IRA has is it's tax-deferred, which means that as your investments earn income over the years, you don't have to pay tax on it. If you keep money in a regular savings account, in a regular brokerage account, you're going to have to pay taxes on the interest, on the dividends, on the capital gains when you sell. You're going to have to do that over time.
But with an IRA, you don't have to do that. Even if you generate income, you don't have to pay tax on it in the current year. Even if you sell something at a profit, you don't have to pay capital gains tax in that year. And really, the only trade-off there is, once money goes into the retirement account, it's a little bit more difficult to get it out before retirement.
The idea here is really to give yourselves a long-term savings vehicle to let that power of tax deferral work to your advantage over the course of your career, and make the most of that tax break that the IRS is willing to give you.
Lapera: Right. I just want to stress that this isn't some kind of loophole that were telling you about. The government did this on purpose. They want you to save for your retirement, especially in an era where pensions are not a common thing anymore. That's why you get all these tax advantages on this account.