What Is an Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) is a type of investment account that offers tax advantages to help individuals save and invest for retirement. There are two main types of IRAs: Traditional IRAs and Roth IRAs.
- Traditional IRA: Contributions to a Traditional IRA may be tax-deductible, and the investments grow tax-deferred until you start making withdrawals in retirement. At that time, the withdrawals are taxed as ordinary income.
- Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible. However, the earnings in a Roth IRA grow tax-free, and qualified withdrawals in retirement are tax-free as well.
Both types of IRAs have contribution limits and eligibility requirements based on factors like income and employment status. IRAs offer a range of investment options such as stocks, bonds, mutual funds, and more, allowing individuals to build a diversified retirement portfolio.
It’s important to note that there are penalties for withdrawing funds from an IRA before a certain age (usually 59 1/2), with some exceptions for specific circumstances.
Purpose of IRA
The main purpose of an IRA is to provide tax-advantaged savings for retirement. IRAs offer two key benefits:
- Tax-deferred or tax-free growth: This allows your money to grow faster over time compared to a regular taxable investment account.
- Traditional IRAs: Contributions may be tax-deductible and earnings grow tax-deferred. You pay taxes on withdrawals in retirement.
- Roth IRAs: Contributions are not tax-deductible, but qualified withdrawals, including earnings, are generally tax-free.
- Saving for retirement: IRAs encourage saving for retirement by providing a dedicated space for your retirement savings and offering contribution limits that increase year after year.
Overall, IRAs are a powerful tool to help you accumulate a nest egg for your golden years.