IRAs. You have heard the acronym before, and you may even have an IRA, but what is it exactly? IRA is the acronym for Individual Retirement Account, and although you may have other retirement accounts, chances are that you will one day utilize an IRA. We will look at what each letter means and why an IRA can be essential to your investment planning.

I is for Individual.

An IRA is for an individual, so that means that the account itself is for you and you alone. You can not have a joint IRA with a spouse or child, and it can not be owned by an entity, for example a trust. Being an individual account you are the only person who can contribute to the account (within IRS guidelines, visit www.irs.gov for more info). You may qualify under the guidelines to personally contribute on an annual basis and you may do a direct-rollover of other qualified accounts, for example an old employer’s 401(k) plan. But the important point is to understand that an IRA is for saving toward your retirement.  

R is for Retirement.

An IRA is specifically for retirement, and with that in mind the IRS has very strict guidelines on when you can access your money, and under what circumstances. Typically withdrawals from your IRA prior to age 59 ½ are assessed a penalty of 10% by the IRS; in addition, you may be required to pay taxes on the amount withdrawn. There are several types of IRAs that all have their own specific guidelines but, in general, your assets in an IRA are to be used after you turn 59 ½.

A is for Account.

An IRA is an account, similar to a checking or savings account where the purpose is to hold your assets. Unlike your checking account where you are not able to purchase stocks or other investments, you are able to invest the money that is held in your IRA. You do not invest in an IRA; you invest the money held in your IRA; that is a key distinction.

IRAs are a vital tool in planning for your retirement, and there are many features that the IRS offers you by saving for retirement in an IRA. There are several types of IRAs, each with their own rules and guidelines, so be sure to read the rules at the IRS website. You can also call the IRS with questions, or consult your financial professional for more information.

Mark Zagrocki is a Financial Advisor and Chartered Retirement Planning Counselor in Westlake.

Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness is not guaranteed. The opinions expressed in this report are those of the author and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Wells Fargo Advisors, LLC. Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Investment and insurance products: Not FDIC insured/ NO bank guarantee/ May lose value. Wells Fargo Advisors is not a legal or tax advisor.