An individual retirement account, IRA, is an investment tool typically used to earn money for retirement savings. A bank IRA is offered through a banking institution and offers a secure way to save for retirement, as bank IRAs are federally insured with the FDIC, Federal Deposit Insurance Corporation. Bank IRAs tend to offer steady returns, and some banks offer no-fee IRA accounts.
The two most common types of IRAs used for retirement investment purposes are the Traditional IRA and the Roth IRA, both of which are likely offered at your local banking institution. The main difference between these two investment vehicles becomes evident at tax time. With a Traditional IRA account, you may be able to avoid paying income taxes on money deposited, but you will pay taxes when you eventually withdraw the money, tax-deferred income. In contrast, a Roth IRA requires you to pay income tax on deposits, but you avoid paying taxes upon withdrawal, tax-exempt income.
Generally, $50 to $2,000 is required as an initial investment to start a bank IRA account. You can have several IRA accounts at various financial institutions. Funds for Traditional IRAs are invested in bonds, funds, stocks and real estate.
With an IRA account, there are annual limits imposed for the total amount of money that can be deposited. As of 2010, if you are under the age of 50 you are limited to contributing $5,000 or the sum of your taxable compensation, whichever is smaller. If you are the age of 50 or older, you can contribute up to $6,000 annually. You can make the maximum contribution with a Roth IRA if your income is less than $105,000 for singles and less than $167,000 for married couples filing jointly.
If you have earned taxable earned income during a calendar year and will not be 70 ½ years old by the end of the year, you are eligible to make contributions to a Traditional IRA. You can continue to make contributions after the age of 70 ½ with a Roth IRA, as long as you still meet the adjusted gross income, AGI, requirements.
Rollovers and Conversions
A rollover transaction consists of moving a qualified retirement plan or existing IRA into a rollover IRA account. IRA owners are only allowed to complete one rollover every 12 months. A conversion involves moving the assets of a Traditional IRA to a Roth IRA, and the transferring of assets may be a taxable transaction.
Although a Roth IRA uses after-tax income for contributions, withdrawals and earnings are tax-free, which could mean significant tax savings down the road. Traditional IRAs require fewer taxes during your contribution years, but you pay taxes once you start withdrawing. A traditional bank IRA is a valuable option if you expect to be in a lower tax bracket by the time you need to start withdrawing funds.
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