Cultivating the Income of the Tax-Deferred IRA

If you do not have a company-provided 401(k) program, you may consider an IRA for tax deferred retirement savings. IRA stands for Independent Retirement Account; by nature, this option is designed for an individual instead of a corporate account. There are two types of IRA accounts, each with unique tax benefits.

Traditional IRA

With a traditional IRA, any contribution you make up to a certain limit in a given year is deductible from your income. This means you are placing pre-tax dollars in the account. You will not owe taxes on profits while you hold the account. Once you reach the withdrawal age of 59 1/2, you will be taxed for the amount you take out at your future income level.

Roth IRA

A Roth IRA has no tax benefit, in the present. You will not get the deduction for contributing funds. However, the funds will grow tax free, and you will not have to pay anything when you make a withdrawal at the withdrawal age. This is a good option for those who have a low current tax bracket but foresee having a high tax bracket later in life. There is a lower maximum contribution to a Roth IRA than a Traditional IRA.

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