An Individual Retirement Account (IRA) is a form of pension provided by many financial institutions in the United States that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayers earned income for the taxpayers eventual benefit in old age. There are several types of IRAs, including:
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Traditional IRA: Contributions may be tax-deductible, and any earnings can potentially grow tax-deferred until you withdraw them in retirement. Many retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
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Roth IRA: Contributions are made with after-tax money, and the money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
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Rollover IRA: Contributions are made with money "rolled over" from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.
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SEP IRA: A tax-deferred retirement savings account set up by business owners or self-employed individuals for themselves and any employees.
IRAs offer tax advantages and a range of investment options, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. The contribution limits for IRAs vary depending on the type of IRA and the tax year, and there are income eligibility requirements for Roth IRAs. IRAs are one of the most effective ways to save and invest for the future, and they allow your money to grow on a tax-deferred or tax-free basis, depending on the type of account.
