An IRA, or Individual Retirement Account, is a personal retirement savings plan in the United States that offers tax advantages for saving money for retirement. It is a trust or account that holds investment assets purchased with a taxpayer's earned income, designed to benefit the taxpayer in old age. There are several types of IRAs, with the most common being:
- Traditional IRA: Contributions are often tax-deductible, meaning you may reduce your taxable income when you contribute. The earnings grow tax-deferred, but withdrawals during retirement are taxed as income.
- Roth IRA: Contributions are made with after-tax money (not deductible), but earnings and qualified withdrawals in retirement are tax-free.
- SEP IRA: A retirement plan allowing employers, typically small businesses or self-employed individuals, to make contributions to an employee's traditional IRA.
- SIMPLE IRA: A plan for small businesses that involves both employer and employee contributions, with simpler administration and lower contribution limits than 401(k)s.
An IRA can be opened through banks, brokerage firms, insurance companies, or other financial institutions. The tax benefits allow your savings to grow faster than in a regular taxable account, providing a practical way to save for retirement. There are also variations such as rollover IRAs, inherited IRAs, and custodial IRAs for minors. In summary, an IRA is a tax-advantaged savings account specifically intended for retirement, helping individuals grow their funds with various tax benefits depending on the type of IRA chosen. This arrangement encourages long-term saving with tax incentives either at contribution or withdrawal, helping individuals secure financial stability in retirement.
