What is a IRA?
IRA is an acronym for Individual Retirement Account. These are savings accounts that allow an individual to save periodically to take care of his financial needs after retirement from active work. These accounts are patronized by the government since they encourage people to plan for their post-retirement financial needs. The government provides incentives in the form of tax concessions to contributions towards Individual Retirement Accounts. These accounts are also known as Individual Retirement Arrangements or Individual Retirement Annuity. In most of the cases, all the three terms are used interchangeably to refer to the same entity.
There are several different types of IRAs popular with the investors. Some common types include: SEP IRAs, Roth IRAs, Simple IRAs and Traditional IRAs. Therefore IRAs can be seen as an instrument for the general public to save for their retirement needs and also reduce their tax liability in the process by taking advantage of the monetary incentives on such accounts offered by the government.
The various tax-incentives provided by the US government on IRAs promotes savings by individual members of the active workforce towards their retirement needs. This is highly desirable from the government’s point of view because it reduces the burden on the government for taking care of the financial needs of retired people living in poverty. By investing in Individual Retirement Accounts, retired people can sustain themselves easily without an active intervention of the government towards meeting their basic minimum financial needs. Even within the active work force, IRAs encourage saving as a habit and inculcates and promotes financial discipline amongst the savers.
The total corpus under the IRAs can be utilized by the government and can generate healthy returns in terms of the interest earned on the savings by the individual account holders. This way, the IRAs promote a symbiotic relationship between the government and the active labor force. Both support each other in a mutually beneficial relationship. The government secures the financial needs of its senior citizens while the individuals get tax benefits and healthy returns on their savings.
Despite the advantages of this savings scheme, there is an upper limit on the amount that an individual can save in a particular financial period in an Individual Retirement Account. This ceiling is determined by the government and is designed to prevent the misuse of the scheme and ensure that its benefits are equally distributed amongst all the members of the active work force. This ceiling also keeps a check on the flow of funds into this scheme owing to the superior returns offered by it in comparison to other investment avenues.
Thus we can see that Individual Retirement Accounts promote a healthy financial environment by encouraging the active members of the labor force to save for their future retirement needs in a secure way. These investment schemes are promoted by the government in various ways ranging from tax concessions to superior rates of interest. These schemes, when properly utilized by the general working population, helps them secure their future needs in a simple and transparent manner.
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