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Investing is full of acronyms and complicated terminology.

But don’t worry; I’m here to help you!

A very commonly talked about and important investing tool that you have probably heard about many times before is an IRA. But, do you really know what an IRA is?

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IRA is short for Individual Retirement Account. It is a savings account that helps people save for retirement. There are primarily two different types of IRA’s. One is a Traditional IRA and the other is a Roth IRA.

Many banks and investment firms offer different types of IRA’s and often times you will change your approach on how aggressive your investment strategy is depending on your age.

Both Roth and Traditional IRA’s can be vehicles to invest into Mutual Funds, Stock Funds, Bonds, and other Equities. You can also use your IRA to invest in precious metals such as gold and silver.

READ THE TWO DIFFERENT TYPES BELOW:

Traditional IRA

A Traditional IRA is a tax deferred retirement account that uses your pretax money for investing. This means that your employer will pay you and you will contribute your money before any taxes are withheld. You will not pay taxes on your investment principal and earnings until you withdraw your money for retirement. However, there are penalties involved if you choose to withdraw your money before a given age. Currently, as of 2017, you must be fifty-nine and a half years old to withdraw money without penalties, but you still need to pay the taxes regardless.

Roth IRA

A Roth IRA is a retirement account that uses after tax money for contributions and allows for tax free growth of your money. Your employer will pay you, taxes will be withheld, then you will invest the money into your Roth IRA account. This means, you do not have to pay taxes on your money when you withdraw it in retirement. Most people believe that Roth IRA’s are the poster child of retirement accounts because you get into pay the taxes at the current rate just in case taxes increase due to legislative actions or income and career progression. However, if you withdraw your money early before the minimum age (which is the same as the Traditional IRA) you will most likely have to pay a penalty and taxes.

Traditional IRA’s have been around since 1977. However, the Roth IRA is still new and has only been around since the Tax Relief Act of 1997. There are limits that you can contribute to your IRA fund every year and it depends upon your age. As of 2017, the most you can contribute to your Roth and Traditional IRA is $5,500 per year. If you are over fifty years old you can make catch up contributions of $1,000 as well, which will allow you overall to invest $6,500 per year.

If you don’t have one, you should open one up today and start your path to a financially secure retirement!

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