What Is An IRA?

With every passing year I am getting closer to retirement age. Hey, we all are. I am at an age now where it feels like I should have started setting money aside when  I was younger if I want to retire a millionaire. I can dream, can't I?

Since I have had to figure some of this stuff out on my own, I thought I should share some of what I learned. I imagine everyone has a basic idea of what an IRA (Individual Retirement Account) is and what it can do for you, but just in case, here is a quick overview. I will discuss in future posts the differences between the different types of IRAs. Also, please excuse the analogies that I share, I tried to make them different than the books that I have read on the subject so that I am not copying anyone (I hope).

An IRA is kind of like a grocery bag. At grocery stores, they used to ask if you wanted your groceries bagged in paper or plastic. Nowadays the options are probably more like plastic or the reusable shopping bags. Similarly, IRAs are offered with either pre-tax or after-tax benefits. As I mentioned above, I will present more on the different types of IRAs and their specific benefits in future blog posts.

Typically, grocery bags are used to store items that you have purchased. This makes them easier to transport until you reach your destination. Similarly, an IRA is used to store your investments until you reach your destination (retirement). An IRA can store many different kinds of investments. You can own stocks, ETFs, Mutual Funds, and even savings accounts inside an IRA. I will most likely discuss each of those types of investments in future blog posts. For now, just know that an IRA holds the different investments that you choose to place in it until you reach retirement.

Why not own some or all of these investments outside of an IRA? You could certainly choose to do so and it might even be beneficial. The primary reason to store them inside an IRA is due to tax treatment. This is likely a gross oversimplification, but pre-tax IRAs provide a tax savings now, grow tax-deferred, then taxes are paid on the investments when they are sold and income is taken at retirement age. After-tax IRAs (taxes were already paid on this money prior to entering the IRA) provide tax-free growth and no taxes are paid when the investments are sold and income taken at retirement age.

I hope that this blog post was helpful. If you notice any mistakes or would like clarification on anything, please leave me a comment below. I may edit this post with more concise information in the future, but for now, this should suffice. Thanks for reading and I appreciate your feedback.