IRA vs regular savings
Hi,
I am trying to get an understanding of the differences between an IRA account and a regular savings account, and the advantages that the former offers. Both of them (in contribution+earnings) are taxed at some point (either at the point of contribution or withdrawl). Then what advantage am I getting in opening an IRA account?
thanks for your clarifications.
-Sam
Permalink Submitted by Alan Spross on Mon, 2008-04-28 04:11
Regular savings – you pay taxes on the earnings every year at whatever your marginal tax rate is.
Traditional IRA – you get a deduction for contributions and the earnings and contributions both are not taxed until you take distributions, usually in retirement. Most people will have a lower tax rate in retirement than while they are working because their retirement income is usually lower than than their salary or earnings while working.
Roth IRA – this type of IRA does not get a deduction for contribution, however all the earnings are tax free if held until retirement. This is generally a better choice for younger people or those in a lower tax bracket when making the contribution. There are no required distributions while the owner remains alive.
IRA accounts also enjoy a degree of creditor protection that regular savings do not. This protection does not extend to divorce settlements or against IRS liens.