The Individual Retirement Account (IRA) is one of the most basic types of retirement savings vehicles available today.

So who can open an Individual Retirement Account (IRA)?

An IRA can be funded by an individual who has earned income in that current year — and is not over the age of 70.5. So if an individual earned $20,000 from his/her job last year, they could open an IRA. Earned income is basically any money earned from working (wages, salary, tips, commission).

How much of my earned income can I contribute?

There are limits how much money an individual can contribute to an IRA each year. Currently in 2017, the contribution limit is $5,500. For individuals over the age of 50, the current 2017 contribution limit is $6,500.

If I need the money how can I get it out of an IRA?

If you are over the age of 59.5, money can be taken out of an IRA — no questions asked. However, if the individual is under 59.5 and needs to take money out of an IRA, things can get a bit tricky. A 10% tax penalty to take the money out of the account must be paid, unless the money is being used for a specific reason. There are a few instances where the 10% penalty will not have to be paid. For example, if the money is being used for qualified education expenses, or a first time home purchase, and some medical costs. If there has been no money taken out of the account by the time the account holder is 70.5, a required minimum distribution (RMD) must be made (annually) to the individual.

What are the tax consequences of contributions/withdrawals from an Individual Retirement Account?

IRA contributions are tax deductible for those folks that fit the requirements. An individual’s eligibility depends on their tax-filing status, how much money they earned that year and whether they have any other retirement accounts. Any withdrawals made from a traditional IRA are taxed as ordinary income. The money was not taxed on the way into a traditional Individual Retirement Account, so the money gets taxed on the way out.

What are the benefits of opening an Individual Retirement Account?

Contributions to an IRA are totally decided upon by the specific individual. The individual has complete control over how much they contribute each year. They can contribute up to the limit ($5,500) or they can contribute nothing at all, it all depends on the individual’s preferences. If the individual meets the requirements for tax deductible contributions, that certainly is a bonus. Earnings within an IRA grow tax-deferred as well. The individual is not paying tax on the investment gain or loss in the account each year.

What are the negatives to opening an IRA?

Waiting until 59.5 to get the money out of an IRA can be tough for some retirement savers. The individual should be almost 100% certain that they will not need this money until they turn 59.5. Getting the money out of the account before then could be costly. Also all of the distributions are fully taxable. That’s not really a negative of an IRA it’s just a part of living in the United States of America. Only cash can be contributed to an Individual Retirement Account, stock or other investments cannot be transferred into an IRA.

When it comes to saving for retirement, everyone knows they should be doing it. But not many people know where to start. A simple place to start would be to understand the different types of retirement accounts available. Once the retirement saver has figured out what type of account to open, it starts to get a little bit easier.

There are a few requirements that need to be met in order to reap all of the benefits of an IRA. Once those Individual Retirement Account requirements are met, you have a great way to save for retirement.