What exactly is an IRA?
An IRA is an account into which you put your money to let earnings grow tax-deferred or even tax-free. There are various IRA types, and you can have more than one account. You can set up an IRA with savings accounts, CDs and also investment accounts. Using securities to fund your IRA means accepting greater risk in exchange for potentially greater reward. Because IRAs are generally intended for retirement savings, there may be federal and state tax penalties on withdrawals before age 59½.
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| What kinds of IRAs are there? |
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With a Traditional IRA, you pay no taxes on earnings until you withdraw them, and your contribution may also be tax deductible. |
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With the Roth IRA, you put after-tax money in, and that amount isn't deductible. Earnings you accumulate are tax-free upon withdrawal, as long as your account has been open five years or more, and you're at least 59½, or using the money for a first-time home purchase, or in case of death or disability. |
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Which IRA should I choose?
That depends on your situation, including your age and participation in a company retirement plan. (Remember, too, you can have more than one kind of IRA.) While your tax adviser can help you make the best decision, here are two rules of thumb: |
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If you expect to be in a lower tax bracket at retirement, you may want to choose a Traditional IRA. |
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But if you expect your tax bracket to remain the same or be higher, you may want a Roth IRA. |
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What are the advantages?
Though similar, the advantages of Traditional and Roth IRAs do differ a little:
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| Traditional IRA |
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Earnings compound tax-free until withdrawals. This allows for potentially faster growth. |
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If you're in a lower tax bracket when you withdraw the money, you could end up paying less in taxes. |
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Your annual contribution may be tax-deductible. |
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If you earn too much to qualify for deductible contributions or a Roth IRA, you can still make non-deductible contributions to a Traditional IRA and benefit from tax-deferred earnings. |
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Roth IRA |
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Earnings are tax-free when you withdraw them, as long as you meet certain conditions. |
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You may make contributions after age 70½ - and you're not required to make withdrawals. |
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For more information - consult a financial professional
If you have additional questions about IRAs, make an appointment with a financial professional today.
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Neither the First American Funds nor any of its representatives may provide tax or legal advice. Any tax information provided reflects our opinion and is not intended to be exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation.
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