What’s So Special about an IRA?

When compared to other methods of investing, there are benefits to using an IRA.

An IRA provides tax deferred growth of your assets, and the result of such growth, over the years, can be quite remarkable in comparison with a regular savings account. Using an advanced calculator online – or asking an advisor or a CPA to run some calculations for you – can be an eye-opening experience.

For most investors, mutual funds will be their best option for cost-efficient diversification. Holding mutual funds outside of an IRA or 401(k) means that the investor will have some taxes, whether long term gains or short term gains, passed on to him or her from the mutual fund company every year that the fund experiences gains.

The upside to this is that investors can harvest losses and use them to diffuse future taxes on the account, but the investor is still subjected to same tax risk, and the real return, or internal rate of return, of the mutual fund account will be affected by the taxation.

If an investor is not earning enough income to have to pay long term capital gains taxes, the retail mutual fund account may not be bad at all. But many investors who have the money to set aside for retirement will also be subject to long term gains taxation. IRAs offer the tax-deferral to avoid taxes that can reduce the returns of a portfolio. IRAs and 401(k)s also give assets a shelter from creditors and lawsuits in most states.

We haven’t even yet mentioned one of the main reasons investors appreciate these, and that’s the immediate tax benefit of lowering taxable income by the amount of the contribution. Putting money in a bank account or retail investment account will not reduce your taxes, but contributions to a Traditional IRA will.