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What is an IRA?

Last Updated on March 7, 2019 by Sultan Beardsley

An IRA, or Individual Retirement Account, is a retirement plan offered by financial institutions. In an IRA, all the money that you choose to contribute is tax-deductible, meaning you don’t have to pay taxes on that money until it’s withdrawn. This is a beneficial trait of retirement accounts, for when you have retired and you choose to withdraw your money, your tax rate will most likely be lower, as your taxable income has noticeably declined.

Many mutual funds offer Individual Retirement Accounts. This provides a relatively safe way to invest your retirement fund, and earn compounded interest on your tax-free money. You can also choose to invest your IRA in individual stocks or bonds. Let’s take a look at the potential benefits of opening an IRA through a mutual fund.

You open an IRA with a mutual fund and contribute $10,000 as your principal investment. Every year, you contribute an additional $10,000. You are very diligent with contributions to your IRA, and consistently contribute funds every year, for 30 years. With a 12% rate of return in your IRA, you will have $2,711,960.73 after 30 years.

Saving for retirement is crucial. Not only does it offer a great way to invest in the market tax-free, but it’s also a wonderful way to accrue interest on money which you can live on for the rest of your life. Let’s face it, no one wants to work forever, so the sooner you get started saving for retirement, the sooner you’ll be able to retire.

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