IRAs Explained?

[amelioratione]

I currently have a variable IRA. I'm not sure how I got one, but I've been slowly putting money into it every other paycheck.

I currently bank with wachovia, and am switching to navy federal. I believe navy federal requires that you purchase IRAs?

I horrible at finances, I was wondering if there was a link someone could direct me to that explains IRAs in a dumb downed way? Or briefly explain the differences between them.

I have looked it up before but it gives me a bunch of fancy terminology percentages that I cant seem to wrap myself around.

I'm sorry if this is very "dumb" seeming I'm only 20 and I'm desperately trying to learn.

[Rich Lunsford]

Thank you for the question! A little confusion in the financial world is par for the course. There are so many options to choose from. IRAs are Individual Retirement Arrangements. There are basically two different types.

First is the Traditional IRA. The Traditional IRA is a way of investing for your retirement. You are allowed to deduct the amount you place into the Traditional IRA to reduce your taxable income at the end of the year, assuming you haven’t exceeded certain Modified Adjusted Gross Income (MAGI) limits. For instance if you made $30,000 in income that you would normally be taxed upon, but you chose to put $4,000 into the Traditional IRA, you would only be required to pay taxes on $26,000 ($30,000 - $4,000 IRA contribution) of your income this year. So you can save on present income taxes due and also set aside money for your retirement – pretty cool huh? In addition, you can make contributions each year up to a maximum limit to build up the IRA for your retirement years. And you get to defer any taxes due on the amount you put in as well as any earnings you make in the IRA until you make a withdrawal (hopefully many years down the road in your retirement).

Second is the Roth IRA. The Roth IRA works a bit differently that the Traditional IRA. The Roth IRA allows you to make annual contributions just like the Traditional IRA. But, you don’t get to deduct the contribution from your taxes this year. So you don’t really get a tax break this year. The advantage of the Roth IRA comes during your retirement. The Roth IRA allows you to take out money in your retirement without any taxes if it is a qualified distribution. So from 20 years old to retirement is a long time. Imagine never having to pay taxes on the earnings you make over a 30 to 40 or even 50 year period of time. It can be quite a large number. I generally recommend that people in their 20s consider a Roth IRA over the Traditional IRA because of the excellent benefit during retirement. The tax deduction you get today for the traditional IRA may not add up to being able to withdraw all of your earnings tax free during retirement in most cases.

So there are the two main types of IRAs. Now keep in mind that an IRA is just the type of account. You can choose the type of investment to place inside the account to produce the growth you desire for your retirement. For instance, you mentioned you have a “variable” IRA. This tells me you are likely investing in mutual funds such as stock or bond mutual funds in your IRA. The value of your account will likely fluctuate up and down. You also have the option of investing in things that will not fluctuate with the stock market if you choose. Financial planners, like myself, work with you to understand your comfort level with investing and make recommendations that are tailored to your needs.

One thing – You should not be required to invest in an IRA by any bank or financial institution. Investment in an IRA is a choice, not a requirement. Keep in mind that USAA has a financial advisers who will answer your detailed questions for free. Give it a try at 1-800-472-8722.

Rich Lunsford is a CERTIFIED FINANCIAL PLANNERTM practitioner with USAA Financial Planning Services, one of the USAA family of companies. Rich holds the Series 7 and 66 securities licenses. Rich also holds the designations of Chartered Financial Consultant (ChFC®), Chartered Life Underwriter (CLU®), and CHARTERED RETIREMENT PLANNING COUNSELOR (CRPC®).

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

[amelioratione]

Thank you very much for taking the time to answer my question! I have a much better idea of what I would like to do with navy federal now.

[OliveJuice]

I know that your experience might not turn out like mine but I want to say something. I've had a traditional IRA since I was 19 (I am now 25) Because of the economy I would have been better off putting the money I have put into my IRA every month for 6 years into a savings account.

Don't get me wrong...2 to 3 years ago my money was doubled but because the financial institution that I went though tanked because of the economy I now have LESS than what I've put into my IRA over the past 6 years.

While a traditional IRA is safer than playing with the stock market you can still lose money. I thought I was perfectly safe with my IRA and would never lose money, what a lesson I learned.

I recently found out that any bank will take an IRA and make it into a CD without any tax penalties. I plan to do this as soon as I get a new bank.

[K.Montague]

Originally Posted by OliveJuice I know that your experience might not turn out like mine but I want to say something. I've had a traditional IRA since I was 19 (I am now 25) Because of the economy I would have been better off putting the money I have put into my IRA every month for 6 years into a savings account. Don't get me wrong...2 to 3 years ago my money was doubled but because the financial institution that I went though tanked because of the economy I now have LESS than what I've put into my IRA over the past 6 years. While a traditional IRA is safer than playing with the stock market you can still lose money. I thought I was perfectly safe with my IRA and would never lose money, what a lesson I learned. I recently found out that any bank will take an IRA and make it into a CD without any tax penalties. I plan to do this as soon as I get a new bank.

For the longest time, I always thought that IRAs couldn't be affected by the economy because it was your own money! Now I know better-thank you so much!

So do you think I'd be better off investing in a CD instead of an IRA?

[OliveJuice]

Originally Posted by K.Montague For the longest time, I always thought that IRAs couldn't be affected by the economy because it was your own money! Now I know better-thank you so much! So do you think I'd be better off investing in a CD instead of an IRA?

I'm not sure. I haven't really looked into CD's that much but I figure, going the IRA way hasn't done me any good so why not try a CD. Put it to you this way....the economy is doing badly right now..... A CD has many different lengths of time to which you put money into it. If you think that you want to invest right now but are unsure how the economy will look like a few years from now, perhaps investing into a short term CD would be wise. I believe this is what I will be doing until the economy picks back up. BUT I'm no banker or investor....talk to your bank or financial adviser.