IRA Explained In Less Than 5 Minutes | Simply Explained

Summary

This video script explains Individual Retirement Accounts (IRAs), emphasizing their benefits over traditional savings accounts for retirement. IRAs allow for market-based investments, potentially yielding higher returns than savings accounts. The script differentiates between Roth and Traditional IRAs, highlighting their tax benefits: Traditional IRAs offer tax deductions on contributions, while Roth IRAs tax withdrawals. It also mentions limitations, such as penalties for early withdrawals and annual contribution limits, promising further details in future videos.

Takeaways

• 💼 IRA stands for Individual Retirement Account, which is a type of savings account designed for retirement.
• 📈 Unlike traditional savings accounts with low interest rates, IRAs allow for market-based investments like stocks and bonds that can yield higher returns.
• 💰 Historically, the market has delivered an average return rate of 7% to 10% for IRAs, significantly higher than typical savings account interest rates.
• 💵 Traditional IRAs offer tax deductions on contributions, reducing your taxable income for the year you contribute.
• 💸 Roth IRAs are taxed when you contribute but not when you withdraw, which is the opposite of Traditional IRAs.
• 🚫 Early withdrawals from an IRA before the age of 59 and a half can result in a 10% tax penalty.
• 💲 There is an annual contribution limit to IRAs, which is $6,000 for individuals under 50 and $7,000 for those over 50.
• 🤔 The video differentiates between Traditional and Roth IRAs, highlighting the key tax benefits and differences.
• 🔍 The script suggests that there is more to learn about IRAs, particularly the distinctions between Traditional and Roth IRAs, and invites viewers to request further content.
• 📺 The video is part of a series of financial education segments provided by Strategic Wealth Designers, encouraging viewers to explore more content.

Q & A

What does IRA stand for?

IRA stands for Individual Retirement Account.

Why should one consider an IRA over a regular savings account?

An IRA allows you to invest in market-based investments like stocks, bonds, and mutual funds, which can potentially offer higher returns compared to the interest rates of a regular savings account.

What is the average annual interest rate for savings accounts as mentioned in the script?

The national average interest rate for savings accounts is 0.05% per year.

What is the historical average rate of return for the market-based investments in an IRA?

Historically, the market has delivered an average rate of return between seven and ten percent for IRA investments.

How does tax treatment differ between a traditional IRA and a Roth IRA?

With a traditional IRA, contributions are tax-deductible, meaning you pay taxes when you withdraw the money. In contrast, a Roth IRA is funded with after-tax dollars, so qualified withdrawals are tax-free.

What is the tax implication of contributing to a traditional IRA?

Contributing to a traditional IRA allows for tax deductions in the year the contribution is made, reducing your taxable income for that year.

At what age can one start withdrawing from an IRA without penalty?

One can start withdrawing from an IRA without penalty after reaching 59 and a half years old.

What is the maximum amount one can contribute to an IRA annually?

The maximum amount one can contribute to an IRA annually is $6,000, or $7,000 if they are over the age of 50.

What is the main difference between the tax benefits of a traditional IRA and a Roth IRA?

The main difference is that a traditional IRA offers tax deductions on contributions, while a Roth IRA does not, but allows for tax-free withdrawals in retirement.

What are the potential penalties for early withdrawal from an IRA?

Withdrawing money from an IRA before the age of 59 and a half can result in a 10% tax penalty.

What is the script's suggestion for viewers who want to learn more about the differences between a traditional IRA and a Roth IRA?

The script suggests that viewers who want to learn more about the differences between a traditional IRA and a Roth IRA should leave a comment, and the creators will consider making a video on that topic in the future.

Outlines

00:00

💼 IRAs Explained: The Basics

This paragraph introduces the concept of an Individual Retirement Account (IRA) as a savings account specifically for retirement purposes. It highlights the difference between a regular savings account, which typically earns a low interest rate, and an IRA, which can be invested in market-based instruments like stocks, bonds, and mutual funds, potentially yielding higher returns. The paragraph also touches on the tax benefits of IRAs, explaining that while savings accounts' interest earnings are taxed, IRAs offer tax advantages depending on the type chosen. It sets the stage for further discussion on the two most popular types of IRAs: Roth and Traditional IRAs.

Keywords

💡IRA

IRA stands for Individual Retirement Account, which is a key concept in the video. It is a type of savings account designed specifically for retirement purposes. The video explains that IRAs allow individuals to invest in market-based investments like stocks, bonds, and mutual funds, which can potentially yield higher returns than traditional savings accounts. IRAs are central to the video's theme of retirement planning and financial growth.

💡Roth IRA

A Roth IRA is a specific type of Individual Retirement Account mentioned in the video. It is characterized by after-tax contributions, meaning that the money put into a Roth IRA has already been taxed, and withdrawals in retirement are tax-free. This contrasts with a Traditional IRA, where contributions are made pre-tax and withdrawals are taxed. The video uses Roth IRA as an example to illustrate the different tax treatment options available with IRAs.

💡Traditional IRA

A Traditional IRA is another type of Individual Retirement Account highlighted in the video. It is distinguished by its tax-deductible contributions, allowing individuals to reduce their taxable income in the year they contribute. However, withdrawals in retirement are taxed. The video contrasts this with a Roth IRA to show the two main types of IRAs and their respective tax benefits.

💡Tax-deductible

Tax-deductible contributions are a key feature of Traditional IRAs discussed in the video. It refers to the ability to reduce one's taxable income by the amount contributed to the IRA. The video explains this concept by giving an example where contributing $5,000 to a Traditional IRA reduces the taxable income from $50,000 to $45,000, thus providing a tax benefit.

💡Market-based investments

Market-based investments are financial instruments like stocks, bonds, and mutual funds that are mentioned as potential investments within an IRA. The video explains that these investments can offer higher returns compared to savings accounts, with historical averages ranging from seven to ten percent. This concept is crucial to understanding the potential growth of an IRA.

💡Tax benefits

Tax benefits are a significant aspect of IRAs discussed in the video. They refer to the preferential tax treatment that contributions to an IRA can receive, either as tax deductions (as in Traditional IRAs) or tax-free withdrawals (as in Roth IRAs). The video emphasizes the importance of these benefits in retirement planning and the potential for tax savings.

💡Early withdrawal penalty

The early withdrawal penalty is a term used in the video to describe the financial penalty imposed for withdrawing money from an IRA before the age of 59 and a half. The video mentions this penalty to highlight the long-term nature of IRAs and the potential financial consequences of accessing funds before retirement.

💡Annual contribution limit

The annual contribution limit is a regulatory cap on how much money can be contributed to an IRA in a given year. The video specifies that the current limit is $6,000 per year, with an additional $1,000 'catch-up' contribution allowed for individuals over 50. This concept is important for understanding the constraints on IRA contributions.

💡High-yield savings account

A high-yield savings account is a type of savings account that offers a higher interest rate than a standard savings account. The video uses this term to compare the potential growth of a savings account with that of an IRA, noting that even a high-yield savings account typically has a lower interest rate than the historical returns of market-based investments in IRAs.

💡Tax season

Tax season is a term used in the video to refer to the period when individuals are required to file their annual tax returns. The video explains how IRA contributions can impact tax filings, with Traditional IRA contributions reducing taxable income for the year, and Roth IRA withdrawals being tax-free, thus affecting the amount of taxes owed during tax season.

Highlights

IRA stands for Individual Retirement Account, a savings account for retirement.

Traditional savings accounts grow based on interest rates, with a national average of 0.05% per year.

IRAs allow investment in market-based assets like stocks, bonds, and mutual funds for potentially higher returns.

Historically, the market has delivered an average return of 7% to 10% for IRAs.

A Traditional IRA offers tax deductions on contributions, reducing taxable income.

With a Traditional IRA, withdrawals are taxed, unlike contributions.

A Roth IRA is the opposite of a Traditional IRA, taxed on contributions but not on withdrawals.

Early withdrawals from an IRA before 59 and a half years old may incur a 10% tax penalty.

The annual contribution limit for IRAs is $6,000, or $7,000 for those over 50.

The video aims to simply explain IRAs in under five minutes.

The presenter is Ali from Strategic Wealth Designers.

The video differentiates between Roth and Traditional IRAs in terms of tax benefits.

The potential return on an IRA investment is illustrated with a $10,000 deposit example.

The video mentions the possibility of future content on the differences between Roth and Traditional IRAs.

Viewers are encouraged to subscribe and like the video for more financial education content.

The video provides a basic understanding of IRAs and hints at more in-depth discussion in future videos.

Transcripts

you've probably heard from a lot of

people you should put some money into an

ira and you're like yeah

[Music]

wait what's an ira

you might have heard of roth iras on

traditional iras but you can't quite

grasp what exactly an ira is well let us

help you out how's it going everybody my

name is ali with strategic well

designers and this is an ira simply

explained in less than five minutes

[Music]

so ira stands for individual retirement

account but what exactly does that mean

well it's like a savings account for

retirement your next question might be

zombie why not just put my money into a

savings account well there are a few

reasons with a savings account your

money can only grow depending on the

interest within that savings account the

national average for interest rates

right now for savings accounts stand out

point zero five percent per year but

let's say you find a high yield savings

account that has a 0.5 interest per year

so if you put in 10 000 into that expect

to make around 50 after one year with an

ira you can put that money into

market-based investments such as stocks

bonds mutual funds etc now the return

rates for iras differ over time and can

be higher or lower but historically

we've seen the market deliver an average

rate of return from seven percent to ten

percent for this example let's say it's

seven percent so for a ten thousand

dollar deposit in an ira you'd expect to

make around seven hundred dollars after

your first year not too bad of a return

right but the good news doesn't end

there if you decide to continue on the

ira round because like everything in the

world your money is taxed and the same

can be said with your savings account

whatever you earn from interest expect

uncle sam to be wanting some piece of

that but with an ira it's different but

to explain how it's different we have to

first talk about the different types of

iras you might have heard of a roth ira

or traditional ira these are the most

popular types of iras now i'm not going

to get into the details of the two in

this video but in terms of tax benefits

here's what you can get with a

traditional ira if you decide to

contribute money to it that money is tax

deductible and let me explain what that

means let's say you make 50 000 a year

and you're single if you do nothing when

the new year comes you will have to file

taxes on that 50 grand however if you

decide to contribute 5 000 to a

traditional ira you'll only have to file

taxes on 45 000 instead of the full 50

saving you some money during tax season

with that being said when you decide to

withdraw money from a traditional ira

that money will be taxed so for example

you're still making fifty thousand

dollars a year and you decide to

withdraw five thousand dollars from your

traditional ira now when tax season

comes you'll have to file taxes on 55

000

so you only get a tax break when you put

money in but not when you take money out

now that's a traditional ira i mentioned

another type of ira earlier and that is

a roth ira in terms of tax benefits a

roth ira is completely just flipped from

a traditional ira where you get taxed

when you put money into it but not when

you get money out

hopefully that all makes sense there's

more to consider with both a traditional

ira as well as a roth ira but we can

save that for a future video now there

are some limitations to having an ira

like a lot of retirement accounts if you

withdraw money before you're 59 and a

half years old you could be charged a 10

tax penalty there's also a limit with

how much money you could put into an ira

every year right now with both a

traditional or roth ira you could put in

a max of six thousand dollars every year

unless you're over the age of 50 then

you can put in a max of seven thousand

dollars a year so i hope that gives you

a good grasp on what exactly an ira is

again there's more to know about these

accounts especially the differences

between a traditional ira and a roth ira

so if you want us to make a video about

that or if you want to learn what

exactly you can do with an ira please

let us know in the comments section and

we can definitely go over that in a

future video but we also have some other

financial education segments on our

youtube page so if you enjoyed this you

might enjoy your other videos so feel

free to click on that subscribe button

and might as well hit that thumbs up

button while you're at it my name is

aldi and we'll see you in the next video

[Music]

you