Individual retirement account facts for kids
An individual retirement account or IRA is a special savings plan. It helps people save money for when they stop working (retirement). Think of an IRA as a special box where you keep your investments. These investments can be things like stocks, bonds, or mutual funds. IRAs offer big tax advantages, which means you might pay less tax on your savings.
Unlike a 401(k) plan, which your boss sets up, you can start an IRA yourself. Even small business owners and people who work for themselves (self-employed) can open an IRA.
Types of IRAs
There are a few different kinds of IRAs. They each have their own rules about how you save money and how taxes work.
- Traditional IRA
With a Traditional IRA, the money you put in might not be taxed right away. This depends on your income and if you have another retirement plan from your job. In 2015 and 2016, you could put up to $5,500 into a Traditional IRA each year. If you were over 50, you could add up to $6,500.
- Roth IRA
When you put money into a Roth IRA, you pay taxes on it right away. But the good news is, when you take the money out later in retirement, it's usually tax-free! The amount you can put into a Roth IRA is usually the same as a Traditional IRA.
- SEP-IRA
A SEP-IRA is for businesses that want to help their employees save for retirement. SEP stands for "Simplified Employee Pension Plan." It's a way for employers to contribute to their employees' retirement savings.
- SIMPLE IRA
A SIMPLE IRA is another type of plan for small businesses. It helps both employees and employers save for retirement. SIMPLE stands for "Savings Incentive Match Plan for Employees." It's often used by small businesses that don't have other big retirement plans.
Self-Directed IRAs
A self-directed IRA is a special type of IRA. It lets you invest in more unusual things. Most IRAs let you invest in common things like stocks or mutual funds. But a self-directed IRA lets you choose other kinds of investments.
For example, you could invest in real estate, precious metals, or even private company stock. These accounts are offered by some financial institutions in the United States. It's important to know that investing in these less common things can sometimes have higher risks.
