How do IRAs work?

Question

Could someone please explain to me in general how IRAs work? I hear that there are many different types of IRAs, but if someone could give me a general overview of how they work and how they differ from a non-retirement account I'd really appreciate it.

On a side note, I know I have a Roth IRA opened up for me, but I'm not exactly sure how it works. I know I have some money invested in J&J, but am I able to invest money in a Roth IRA in other places other than stock such as mutual funds? Also, do people commonly have more than one type of IRA? Do people commonly have both an IRA and a non-retirement account?

Answer 1

www.ira.com

Answer 2

As mentioned before, there are Traditional and Roth IRA's.  The main difference is in when you pay tax.  

In a traditional IRA you invest the money without tax taken out, let's say in J&J, and when you retire and start taking money out of the IRA you pay tax on it as if it was money you got from a job.

In a Roth IRA you pay tax on your money when you get your paycheck, just like you normally do.  You then invest what's left, again let's say in J&J, and when you retire and take money out you do not pay tax.

It's good to have both (generally), to spread out your tax burden.  

It's also good to have a broad investment scheme and not have all your money in one place.  Start looking at index and mutual funds and familiarize yourself with how they work and what makes sense for you to buy.  You can buy these just like stock through your IRA.  As someone else said, IRA's are just a vehicle for investing in many different specific things.

It's also common to have money market or savings accounts.  This is like your everyday account you can take money out of with a debit card or something.  Retirement accounts cannot be touched before 591/2 (I think) without incurring a 10% penalty.

Answer 3

There are more than TWO IRAs.  Don't listen to quacks.  There are Traditional, Roth, SEP-IRAs, Educational IRAs, & SIMPLE-IRAs.

Traditional IRA - 1974.  Maximum contribution $5,000 a year if over 50 $6000 a year.  Have to keep the money in the IRA until your 591/2 or you will incur a 10% IRS penalty.  Must start taking some money out at 701/2.

IRA contribution is tax deductible.  If you have a retirement plan at work then it will depend.  The IRA grows tax deferred. You pay no taxes while the IRA grows - only when you take the money out.  You can invest the IRA money in mutual funds.  This goes for all IRAs.

The biggest difference between IRAs and non-retirement accounts is TAX DEFERRAL & TAX DEDUCTIBLITY.  This will allow your money to grow a lot faster.  

Do most people have more than one IRA - No.  The other IRAs haven't been around long enough to change that.

Do people commonly have an IRA and non-retirement accounts.  Yes.  Because most retirees only had pensions or IRAs then sold there homes and put the money at the bank in CDs.  Now they are lining up around the corner to see if they can get what's left from there Cds.

Hope that helps.

Answer 4

Actually, there are only 2 types of IRA.  Traditional and Roth.  Neither is an actual investment.  They refer to how the SHELL known as an IRA is treated for tax purposes.  INSIDE the IRA you can invest in almost anything.  Some people even invest their IRA in rental property.  The ONLY thing that distinguishes an IRA from any other investment is the paperwork to acknowledge for tax purposes that it IS an IRA.