Let’s get down to business to saving for retirement. I will skip over the importance of the Thrift Savings Plan (TSP) because, in my opinion, there are some considerations you need to think about before putting money into the TSP.
An IRA is simply a shelter for money to go into that has tax advantages. The limit is $4000 for 2006. Once you put in your money into an IRA you can then buy/invest in whatever you want; i.e. stocks, bonds, or art, if you want to. There are officially 11 types of IRA’s; however, there are two common ones that most brokers offer. The Traditional IRA and the Roth IRA.
Traditional IRA – A traditional IRA is where you put your money into an IRA and it subtracts from your taxable income for that year. So if my taxable income was $24k last year and I invested my $4k limit into a traditional IRA; it would subtract my taxable income to $20k. Then every year I put my money into it, it would grow tax free until I turn 59 ½. Once I turn 59 ½ I can start to take money out of it and I will be taxed as income. The traditional IRA is not very common for a lot of people. Most people, who have to worry about retirement, don’t make enough money to warrant the benefit of a traditional IRA.
Roth IRA – A Roth IRA has the same maximum $4k; except, it doesn’t subtract from your taxable income. When I turn 59 ½ there are no taxes taken out when I start to use my money.
An IRA allows your money to grow tax free until you retire. You can’t take out your money once you put it in or else you will get penalized; however, there are exceptions to this rule. Read this article from Motley Fool to explain these exceptions