An individual retirement IRA account is a form of long-term savings that allows you to obtain a high return and certain tax advantages.
Therefore, we are facing a savings product that combines the advantages of compound interest and favorable taxation. Thus, it allows you to create an amount of money greater than the capital contributed, due to the accumulated interest.
What the financial institution does is invest our savings in shares, obligations, bonds and other financial products. On the other hand, the choice of these will depend on the type of investor and their aversion to risk or not, always bearing in mind that the higher the risk, the higher the return.
Why open an IRA account?
There are many reasons to open an IRA account, but all of them are based on one premise: to get the highest possible return on long-term savings. Let’s see some of the most relevant when choosing this product.
- First of all, it is a long-term savings plan and, therefore, compound interest comes into play. This means that the interests that are generated, if they are not withdrawn (which is usual), are accumulated together with the capital and will be the starting point for the following interests.
- On the other hand, it is a product adapted to retirement. This means that it allows you to prepare it with time and tranquility. When the time comes, it will be a cushion that will form an important complementary income.
- In addition, it has certain tax advantages. In this way, we only declare the capital income when proceeding to withdraw it (at maturity) or when we contribute to the plan. This will allow you to choose two types of account as we will see below.
Traditional IRA and Roth IRA
As we have already mentioned, there are two types. On the one hand, the traditional IRA and on the other, the Roth IRA. Let’s look at each of them in detail.
- The traditional IRA account allows you to make contributions adapted to the user’s profile. In this way, he decides how much money to save. On the other hand, it has certain tax advantages such as deferred payment of taxes when the money is withdrawn in retirement.
- For its part, the Roth IRA allows you to continue contributing even after retirement. This condition allows leaving the heirs a fund that, in addition, will be free of taxes since these are paid in advance with the contributions.
IRA savings and investment account
Finally, let’s see the difference between two ways of understanding this product based on the customer’s profile, savings or investment.
The first is low risk, for people with a conservative profile who are just looking to save. In addition, they have certificates of deposit that guarantee the invested capital. Of course, its profitability is low.
For its part, the investment IRA account is for a non-conservative profile. Thus, invest in stocks, bonds or exchange-traded funds. In this case, their profitability is higher, but they are not secured by certificates of deposit and could lose value.