What Is an Individual Retirement Account (IRA)?

Creating a retirement corpus is very often the top reason behind the investments made by the investors. There are many different types of instruments where you can invest to gain inflation-beating returns and build a substantial corpus for your retirement. An Individual Retirement Account (IRA) is one such tool that can help you to save for your retirement in a tax-efficient way.

An Individual Retirement Account (IRA) is basically a special type of savings account where you can park your money for the purpose of creating a retirement corpus. The main advantage of an IRA is that it allows you to defer paying taxes on your returns from the investment, until you choose to withdraw the funds.Since this account is specifically meant for the purpose of creating a retirement corpus, you are not allowed to withdraw funds until you attain the age of 60. In case you decide to withdraw your investment before the age of 60, you may have to pay a penalty for doing so.

There are three different types of IRAs with each of them having its own tax implications and eligibility requirements.

• Traditional IRA A traditional IRA allows you to deduct the amount of your investments from your tax return. Every time you make an investment in a traditional IRA, your taxable income gets reduced by the amount invested by you. This means that you will able to grow your investments without having to pay taxes on the earnings from them, until you withdraw them at the time of your retirement.
• Roth IRA A Roth IRA allows you to invest your money after deducting the taxes and then earn tax-free returns till the time of your retirement. Unlike the traditional IRA, you won’t be able to claim deductions from your taxable income at the time of making the investment in Roth IRA. However, the advantage is that you don’t have to pay any tax at the time of withdrawal of your investment.
• Simple IRA The Simple IRA is meant for self-employed individuals or small business owners. Same taxation rules are applicable for simple IRAs as it is for traditional IRAs. A simple IRA allows the small business owners to contribute towards creating a retirement corpus for themselves as well as their employees.

The Final Word Individual Retirement Account (IRA) is a useful tool that can help you to build a retirement corpus in a tax-efficient manner. Whether to go for a traditional IRA or a Roth IRA is more of a personal choice since both of them allow you to grow your money tax-free over the years and earn higher returns than most of the taxable investment accounts.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.