Photo by micsalac.

In my last post, Save Early and Become a Millionaire, I commented on how a 16 year old can go from a pauper to a millionaire by saving up some cash and investing it in a Roth IRA over 40 years. I wanted to do a little more research and find out exactly what an IRA is. So this is what I found out…

IRA stands for Individual Retirement Account. It’s a retirement plan that lets you contribute up to a certain amount per year and provides tax advantages too. After you establish the account you can invest in bonds, stocks, mutual finds and CDs just like a regular cash account. There are a few different IRAs but the two most common types are Traditional and Roth. Roth IRAs were created to encourage people to save for retirement by offering significant tax breaks.

So what’s the difference between Traditional and Roth? Good question. Now listen up, this part is important. With a Roth IRA you pay income tax, and then make your contribution with after tax dollars. There are no taxes when you make a withdrawal. With a Traditional IRA you get a tax deduction, which lets you deposit before tax dollars then when you make contributions but you also pay income tax on the entire amount of your withdrawals. Roth has the extra advantage since taxes will probably rise in the future; paying taxes now rather than later will save you money in the end. Read more…

When I was a college student I rarely had any extra money, but when I did I was responsible and saved it. That extra money went into my savings account and sat there, never doing anything until one day I closed the account when I moved away. The point of this story is that there is a better way. Instead of putting away savings that won’t work for you, put that same money into a high-yield savings account that will work for you! There are many high-interest savings accounts out there, just take your pick. Read more…