# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
IRA

One easy way to become a more tax-efficient investor is to utilize tax-advantaged accounts such as individual retirement accounts (IRAs), which come in two varities—Traditional and Roth.

These special accounts allow you to enjoy either tax-deferred or tax-free growth of your investments. Tax deferral can lead to significant savings over time. Let's assume two investors each start with $10,000 and earn a 10% annual return for 30 years. One has 100% of her gains tax-deferred, while the other realizes the full amount of his capital gains each year and pays a 20% tax on those gains. Under this scenario, the tax-deferred investor ends up with almost $75,000 more at the end than the investor with the taxable gains.

IRAs can be invested in any type of publicly traded security, including stocks, bonds, and mutual funds. Generally, there's no limit to switching investments or money managers within an institution, although there could be tax penalties involved if you switch between different types of IRA accounts. Some institutions tack on fees for switching accounts to another firm.

Traditional IRA

Don't let the name fool you: The traditional IRA is actually a revolutionary way to save money for retirement. Why? For one thing, your contribution to a traditional IRA may be tax-deductible, depending on how much you earn each year. If you qualify, the money you tuck into a traditional IRA isn't taxed until you withdraw it.

Even if your contribution is taxable, it's still a good idea to invest in a traditional IRA, since your assets will grow tax-deferred. Because you don't lose anything to taxes, the full amount of the return you make in any given year sticks around to earn even more money the next year.

So why call it traditional? Because a new kind of IRA, named the Roth IRA, was created a few years ago. Unlike most sequels, the Roth can be just as good, if not better, than the original IRA for some investors. For those who aren't allowed to use a Roth IRA (because they make too much money), a traditional IRA is still a great thing.

Roth IRA

The Roth IRA got its name from the man who invented it in 1997, Senator William Roth. Roth's invention differs from a traditional IRA in several ways. For many investors, it's a better idea to invest in a Roth IRA than in a traditional IRA.

Unfortunately, you can't start or contribute to a Roth IRA if you make more than $110,000 a year on your own, or $160,000 as a married couple. Unlike a traditional IRA, the money you contribute to a Roth IRA isn't tax-deductible. But after you invest in a Roth IRA, you never have to worry about paying taxes on that money or any returns it might earn again. That's a powerful advantage, especially if you'll be paying less in taxes when you put money in than when you'll be taking money out.

Roth IRAs have other advantages, too. While a traditional IRA forces you to start withdrawing cash and paying taxes on the money at age 70 1/2, you can wait as long as you like before dipping into your Roth IRA. You can also withdraw any of your Roth IRA contributions, if you need to, without penalties. Pluck out any investment earnings you make before you're 59 1/2, however, and you'll get hit with some penalties.

Educational IRA

When is an IRA not a retirement account? When it's an Education IRA. That's because you invest in an Education IRA to help pay for your children's college expenses (such as tuition, fees, and books), not to help pay for your retirement.

As long as your child is under the age of 18, you can contribute to his Education IRA (now known as the Coverdell Savings Account).

Money in your child's Education IRA grows tax-free, just like cash in any IRA. When your teenager heads off to school, he can withdraw that money to pay for higher education. As long as your new scholar uses that cash for education, he won't owe any taxes on the money taken out. And if Junior doesn't end up spending it all on those college bills (though there's not much chance of that actually happening), the money can be passed along to a younger sibling's Education IRA.

Children have until age 30 to spend their Education IRA money. Any money left after that time, and any earnings ever withdrawn to pay for anything other than education expenses, are subject to taxes and a penalty.

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