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IRA 101: the Basics of Traditional and Roth IRAs

You've likely heard the advice more than once that everyone should own an IRA. Maybe you even have one already.

These retirement accounts are one of the most effective ways for ordinary people to build wealth. They can also be complex and overwhelming at first.

If you are thinking about opening your first IRA, or you have one already and want to understand it a little better, here are all the basics you should know.

An IRA, or Individual Retirement Account, is a lot like other investment accounts. Money in an IRA can be invested in stocks, bonds, real estate, etc.

What sets an IRA apart is that it is specifically intended for people saving for retirement. This comes with some restrictions, but also unique benefits.

In particular, IRAs and their cousin, 401(k)s, offer tax advantages that accelerate your money's ability to grow over time.

However, withdrawing money from the account before retirement age can come with steep penalties.

One way to think of an IRA is like a jacket that you wrap around your savings to keep it safe while it grows over time.

A Traditional IRA is a pre-tax account. You can put money into it before paying income tax, and then only pay taxes when you withdraw later.

A Roth IRA is a post-tax account. You pay normal income taxes on your money now, then none in retirement.

There is some debate over whether the Roth or Traditional option is best, but each offers a huge wealth-building advantage.

Who Needs an IRA?

An IRA is a massive wealth-building tool for anyone who wants to retire or build their net worth over time.

When is the best time to start one?

Time is one of the best advantages of an IRA. The earlier you can start it, even with a small amount of money, the better!

How much do I need to start?

There is no minimum to open an IRA, although some specific investments will have one. If all you have is $20, that's great!

Where can I open an IRA?

Most banks and financial businesses will have offerings, but some of the most popular are Vanguard, Fidelity, and Charles Schwab.

What do I invest my Ira in?

There are countless answers to that question, but low-cost index funds are a terrific, reliable place for new investors to start.

Swipe up for a thorough guide to retirement account basics, with everything you need from IR-A to IR-Z