An IRA is not a type of investment in and of itself. It’s a type of account that serves as a holding account for your assets. Within a single account, you can invest in a variety of assets. Your IRA provider is the custodian of your account and will invest the funds according to your terms and objectives. It is a straightforward method to get a head start on saving for the future while also offering tax benefits.
How Does an IRA Work?
An IRA account can be opened at a bank, a brokerage firm, a mutual fund company, an insurance company, or a variety of other financial institutions. Your money will be invested in CDs, bonds, mutual funds, equities, and nearly any other sort of asset on the market by a broker or other representative of the firm. You may have some control over your account and can select how to direct portions of your funds in specific instances.
Types of IRAs:
Traditional IRA – contributions are made with money that you may be able to deduct on your taxes, and any earnings grow tax-deferred until you withdraw them in retirement. Many retirees find themselves in a lower tax band than they were prior to retirement, therefore the money may be taxed at a lower rate due to the tax deferral.
Roth IRA – contributions are made using money that has already been taxed (after-tax), and your money may grow tax-free, with tax-free withdrawals in retirement, if certain conditions are met.
Rollover IRA – Money from a qualifying retirement plan is “rolled over” into this traditional IRA. Rollovers are the transfer of qualified assets from an employer-sponsored plan, such as a 401(k) or 403(b), to an individual retirement account.