5 Things to know about IRAs

With pensions disappearing and social security in jeopardy, more and more Americans are trying to figure out how they are going to pay for their retirement? Individual retirement accounts are an important way. I am Kevin McCormally of Kiplinger, with five things you must know about IRAs. First, for almost everyone, the Roth IRA is better than the traditional IRA. Sure, you have to give up the deduction when you put money in the account, but to trade off is terrific. Uncle Sam will not be standing by to demand the share of the withdrawal from the IRA.

While withdrawals from traditional IRAs are taxed in your top taxed bracket, withdrawals from Roth IRAs are tax-free. Second, as soon as your kids have a job, even from babysitting, they can have an IRA. It's even okay if you come up with the money that go into the account. Long term compounding, inside this tax shelter can be worth a fortune. Number 3, sooner is better than later, for your contributions. Sure, you have until April 15th of the following year to make this year's IRA contribution, but giving money in the first possible day of the year, rather than year-and-a-half later, can be worth a fortune in the extra compounding.

Number 4, stocks are better than bonds, since an IRA is a long term investment, it makes sense to go for investments that are better over the long term and over the long terms, stocks have produced about a 10.5% annual return. Bonds on the other hand are close to 5.5%, what a difference that 5% point spread can make to your retirement nest egg. Finally, name a beneficiary for your IRA. Doing so makes sure that your heirs can stretch out the tax shelter over their life expectancies too. If you leave the IRA to an estate, the IRA is life to be cut short. I am Kevin McCormally, and these are the basics.



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