“What Is an IRA, Anyhow?”
The kid looked at me with a blank stare, “What is a IRA, anyway? You’ve been talkin’ about them for like, half an hour, but I got no idea what you’re talkin’ about!”
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The kid did have a point. I’d just finished a lecture on the merits of IRA investing to a class at a local community college. I’d been throwing out all types of IRA Lingo like, “maximum contribution,” and “required minimum distribution,” like they were experts. It was one of my first lectures, and it definitely got pretty hot in that room as I realized I’d basically wasted the last half-an-hour.
So, What Is an IRA?
| IRA – (noun) – [pronounced ‘eye-are-aye’] Stands for ‘Individual Retirement Arrangement (Account)’: A type of account created by the federal government to give individuals a tax-advantaged way to save and invest money. |
It’s pretty simple. So that’s what I told them. A pimply-faced boy rose his hand and said, “But you were talkin’ about like, different types of IRAs and stuff.”
Types of IRAs?
- ‘Traditional’ IRAs (usually just called ‘IRAs’) and
- ‘Roth’ IRAs.
The biggest difference between the two is taxation.
*Quick Read: Traditional IRA vs Roth IRA* (new window)
How to start a Roth IRA in 6 easy steps
Roth IRA
I like Roth IRAs better. The taxation is awesome, especially for young people.
Quick summary of what it means to say ‘Roth IRA’ (new window)
How do contributions (deposits) work in a Roth IRA?
How are withdrawals (distributions) treated in Roth IRAs? (new window)
Can I roll my 401k into a Roth IRA?
Traditional IRA Traditionals may be a good choice for you if you need a tax break right now. Read a quick summary of how Traditional IRAs work (new window) How are withdrawals (distributions) treated in Traditional IRAs? (new window) IRAs are designed as long-term savings vehicles. If you withdraw money from your account before the magical ‘retirement age’ (59 and-a-half), the withdrawal could be subject to taxation and penalty (especially in a Traditional). One way or the other, try to plan on leaving your $$ in there for the long-term. Short-term or fixed-term IRAThese are another option if you don’t want to leave your $$ in there for the long-term. Like for instance,
- Let’s say you’re 30 years old
- You have $15,000 saved
- You want to buy a house with it in 6 months
- You want to earn some interest on your $15,000 from now until then
- But you don’t want to leave it in there for 30 years
- You don’t want to pay taxes
- And you don’t want to be penalized
A short-term IRA may work well for you. You get to select the term, or length of time you want to leave your money in (1 month to 10 years). Then, the bank pays you interest. “What is a IRA?” (Cont.)
Usually these types of accounts are FDIC insured, which means they are low-risk. And remember, since investing in all about risk-vs-reward, if you’re taking on very little risk, you can reasonable expect out-sized returns.
Check out Bank of America CD rates to get an idea of what the going market rate is. (new window)
Find the best IRA short-term IRA rates. (new window)
So, long story short…
“What Is a IRA, anyway? Absolutely awesome, is what they are!
If you don’t currently have one, you have to, have to, have to start one. Ask yourself this question..“If the government wanted to give me between $20K and $1M over the next 10-40 years, would it be smart to take it?” Enough said.
Get Started. Open an IRA now.
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