What is an IRA?

[Radiance]

I have a 401k, but I am told I should open an IRA too.
What is an IRA?

[nycguy567]

I have a 401k, but I am told I should open an IRA too.
What is an IRA?

you couldnt google this? it's an Individual Retirement Account that you pay in yourself with no matching contributions from anyone.

[Radiance]

I've been reading, but this is a complicated topic for me.
If there will be no matching contributions, why do I need one?
Shouldn't I just contribute more to the 401k?

[creditcardfree]

You can open an IRA, at a mutual fund company, a bank or brokerage firm. It is in addition to your 401K. The money you contribute, up to $5000/year, reduces the amount of taxable income you have for the year. The money can be invested in cash, individual stocks, or mutual funds (which are a collection of many stocks). The dividends or earnings, are tax free until you withdraw the funds in retirement. The earliest you can withdraw them is age 59 1/2, but you will have to start taking withdrawals by age 70 1/2, since the government will want to tax those funds eventually!!

My description above is about a traditional IRA, rather than a roth ira. You can contribute your $5K per year to either account, or divided among the two. Most people opt for one or the other.

That's my first stab at describing it.

[GREENBACK]

Yeah, do a search for this. Your individual situation and future expectations will determine how you want to balance the 401k and a possible IRA.

There are different types of IRA's and a lot depends on what you expect to withdrawl at retirement. Search and ask again if you have questions.

[rizzmo]

Just an addition to creditcardfree's post. If you are earn more than a certain amount yearly (I believe it is 104k currently) contributing to a IRA does not reduce your taxable income.

[creditcardfree]

Shouldn't I just contribute more to the 401k?

Not necessarily, you have far more investment options outside of a 401K. Many 401K plans only have ten or so investments for you to choose from. Compare that to several thousand available outside your 401K plan.

It is always good to contribute to your 401K up to the amount your employer will match. This varies amoung employers, but if your employer only matches up to 6% of your income, than anything above that does not get the match. That money may be better served in IRA, where you have more choices for investment.

Technically, you could just contribute more to the 401K...up to the limit of $16,500 for 2009.

[disneysteve]

Let me focus on the advantages of an IRA/Roth over a 401k.

1. You control the investment options. You aren't limited to the choices offered by your employer. You can buy individual stocks and bonds, mutual funds, CDs, even real estate. You can't do that with a 401k.

2. If you change employers, it doesn't matter since the account is not linked in any way to your employer.

3. With a Roth, the money goes in after tax and is tax-free when withdrawn in retirement.

4. With a Roth, there is no minimum withdrawal requirement. If you don't need the money right away, you can leave it in there growing tax-free. You can even leave it to your heirs upon your death.

5. Although I strongly advise against ever doing this, contributions to a Roth can be withdrawn at any time for any reason without penalty. This should only be done in a dire emergency, but the possibility does exist.

[zetta]

I believe the traditional IRA is not tax-deductible for you if you participate in a 401k plan.

[Scanner]

It sounds like a basic question, and it is, but I did have a hard time understanding it for awhile.

An IRA (Roth or Traditional) is only an account. You can have many different vehicles in the account - stocks, bonds, mutual funds, CD's Exchange Traded Funds, you can even own physical gold or silver if you get a custodial type of agreement for it. Or just a vanilla savings account. It's only an account (or can be more than 1 account but it can't add up past $5000/year)

Most people by and large use mutual funds as the preferred vehicle.

A Traditional goes in and it lowers your taxes that year. So if you make 50,000 and put $5000 in, you only pay tax on 45000. A Roth is if you make 50,000, you still pay tax on $50,000 but you pay no tax on withdraw. In retirement, that's tax-free money because you already paid tax on it.

And our legislators would never dream of changing their mind years later and taxing it

All earnings acrue tax free in both types.

I hope this helps.

As far as zetta's claim that you can't use traditional and a 401(k) to lower your tax liability, I admit I don't know but a phone call to any mutual fund co. could probably answer that.

I also wanted to add that sooner or later on the Traditional, I think you have to start taking the withdraw (and pay taxes). The government wants their money sooner or later. I must also admit, retirement is so far away, I don't think much about taking withdrawals.

[sandyandry]

I was also not knowing about IRA, but just googled it and found many results. And wiki gave me some information, if you want you can check this link

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Budget software

[Taxplanr]

When you invest in an IRA you must abide by IRS rules. When you invest with a 401k you invest with company and IRS rules.

When you invest outside of retirement accounts you have IRS rules.