Anyone can save money for their retirement, not just those individuals who are lucky enough to have access to a 401(k) plan offered by the company where they work. An IRA, or individual retirement arrangement, is a great way to build up funds and garner tax advantages all at the same time. So if you are self-employed, do not have a 401(k) option or even as a supplement to your existing 401(k), an IRA will serve you very well.

There are two main types of IRAs, Roth and traditional, and they work in different ways. Now, both traditional and Roth IRAs rely on personal contributions and can be opened at banks and most brokerages, but they differ in tax treatments.

Traditional IRA

If you are not covered by a retirement plan at the place you work, you are allowed to deduct any IRA contributions from your gross income for tax purposes. This is great new for you because it lowers your adjusted gross income, and a lower adjusted income means lower taxes. In addition, the money you earn grows tax deferred until you reach retirement age and begin withdrawing them.

Now, you can take money out of your IRA account at any time, but under most circumstances, you will get hit with an additional 10 percent early withdrawal penalty in addition to other taxes.

Roth IRA

The money you deposit in a Roth IRA account is post tax, simply meaning that those funds are deposited after income taxes on the money has been paid. However, any interest or investment returns earned by the money you have are tax-free once retirement age is reached. This is an appealing option for the younger generation of workers who may pay a low tax rate now and wish to avoid possible higher rates on their income after they have retired.

IRAs are useful instruments that can help supplement other retirement funds, keeping you on track with your retirement goals. For more information concerning IRAs, contact your Northbrook retirement planning services providers.