Planning & Education | Why Open an IRA?

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The Basics |

Why Open an IRA?

There are many different products you could use to build wealth for retirement. You could open a savings account, invest in mutual funds, or buy stocks and bonds. So why open an IRA? Because it's specifically designed for retirement savings and provides advantages you won't find with most other financial vehicles: contributions may be tax-deductible (for a traditional IRA), investment growth is tax-deferred, and distributions of earnings may be completely tax-free if certain requirements are met (Roth IRA).

Tax-Deductible Contributions
If you meet certain criteria explained in the section (Types of IRAs), part or all of the amount you invest in a Traditional IRA can be deducted from your taxable income for the year up to $5,000.¹ This means that by investing in a Traditional IRA, you may actually reduce the current taxes you pay at the end of the year.

Tax-Deferred Growth
The earnings on your contributions are not taxed until you withdraw them in retirement, so it can be possible to accumulate funds much faster in an IRA than in a taxable account. Pre-tax contributions also are taxed upon withdrawal.

Tax-Free Distributions of Earnings
The earnings on your contributions may be withdrawn tax-free from a Roth IRA if you meet certain criteria explained in the section (Types of IRAs).

Portability
If you're thinking that investing in an IRA will tie up your money in one place, don't worry. IRAs are very portable and can be moved between institutions or combined into other tax-deferred products. As an aside, if you change jobs or retire, you can roll over your retirement plan money into a Rollover IRA.

Catch-up Contributions
If you're close to retirement and think it's too late to benefit from an IRA, take another look. Having only a few years of tax advantages can still make a difference, and since you hopefully will have a long retirement, you may not need to access your IRA money for a while, so you can use it later on in retirement. Individuals aged 50 and older can make "catch-up" contributions of $1,000 per year.

Of course, saving money in an IRA is not the only important component to an effective retirement savings strategy. Investing in mutual funds, buying stocks, and owning your own home can help to build funds for retirement, too. But the tax advantages of IRAs can't be ignored — they're critical for building long-term assets.

1. The maximum contribution limit for an individual in 2009 is $5,000.

This does not constitute tax advice. Consult your tax advisor. There are fees, expenses, deferred taxes and penalties and withholding for early withdrawals associated with IRAs.

Investors should consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. Download a prospectus that contains this and other information about a fund, and read it carefully before investing.