The Importance Of An Individual Retirement Account

An individual retirement account (or IRA) is an essential component of prudent financial planning. It is a retirement plan account that provides some tax advantages for retirement savings. If you are interested to understand what individual retirement account is for, continue to read on.

The Individual Retirement Account (IRA)

The individual retirement account, as its name states, is for one person - an individual. The reason this is pointed out is that a majority of people tend to open retirement accounts jointly with their spouses. While this is not a bad idea in itself, you may wish to open an individual retirement account for several reasons. The opening of an individual retirement account does not preclude you from opening other retirement accounts. In these uncertain times fraught with economic and political uncertainty, it is a good idea to plan for your retirement as early as possible.

One of the advantages of an individual retirement account is that if you should face bankruptcy, the funds in the IRA are exempt from the bankruptcy estate. Legislation has indicated that because rights to withdrawals are based on age, individual retirement accounts should receive the same protection as other retirement plans.

Another advantage of an individual retirement account is that it offers some protection from creditors. Many states have laws that prohibit judgments from lawsuits to be satisfied by seizure of IRA assets. For example, IRAs are protected up to $500,000 in Nevada from Writs of Execution. However, this type of protection does not usually exist in the case of divorce, failure to pay taxes, deeds of trust, and fraud. Assets in the individual retirement account must be deposited before a lawsuit exists to receive this protection.

An important advantage regarding individual retirement accounts is related to the unfortunate issue of estate taxes. If you and your spouse had signed up for a joint retirement account, then in the event of your spouse's death, a significant amount of the funds in the joint account will be deducted for estate taxes. In the case of individual retirement accounts, the estate taxes will only apply to your spouse's account balance. In a joint account, the tax burden will be higher since the joint funds will be larger than in individual accounts.

Do note that it is a prohibited transaction for the individual retirement account owner to borrow money from the individual retirement account. Such a transaction disqualifies the individual retirement account from special tax treatment.

You can never start too early to start saving for your retirement. It is easier to build up your retirement funds gradually when you start saving from a younger age than to scramble when you are older and you may have greater demands on your funds for your own and family needs. An individual retirement account (or IRA) is an essential component of this early retirement planning process. There are several advantages to this form of retirement account as described above.

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