Can some explain to me in plain English how an ira works? ?

Question

I'm looking forward to starting a saving plan for my retirement,but I'm a little confused about just what an ira does and how. The Lingo can be a bit much

Answer 1

There are two types of IRA the regular IRA and the ROTH IRA

With the regular IRA, when you put money in, the amount is subtracted from your income for calculating income taxes.  The money in the IRA is never taxed while it is in the IRA but when you take money out you have to pay income taxes on the amount you take out.  

If you take any money out early (before the year you reach 59 and a half) you must also pay a penalty of 10% of the amount withdrawn.

With the ROTH IRA. you don't get the income reduction resulting in lower taxes when you put money but you never pay income tax on any qualified (not early) withdrawal.

The ROTH IRA also has a 10% penalty for unqualified (early) withdrawals

As with most government programs there are enough rules to ensure confusion.  But the basics are in the above paragraphs.

With the regular IRA you defer taxes until the money is used.

With the ROTH IRA you pay taxes up front but avoid all future taxes on the growth of your money.

In most cases, for people with several years or more before they will be withdrawing money, the ROTH IRA is better.  But check with the people that will be holding and investing your money for you about what is best for your circumstances.