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Individual Retirement Account

Individual Retirement Account

An Individual Retirement Account (IRA) is a type of retirement savings account that offers tax advantages to individuals in the United States. IRAs are designed to help individuals save for their retirement by allowing them to invest money in various financial instruments, such as stocks, bonds, mutual funds, and other assets, in a tax-advantaged manner.

There are two main types of IRAs:

  1. Traditional IRA: Contributions to a traditional IRA may be tax-deductible, meaning you can reduce your taxable income by the amount you contribute to the IRA. The investments in the account grow tax-deferred, which means you don’t pay taxes on the gains until you withdraw the funds in retirement. When you withdraw the money in retirement, the withdrawals are then taxed as ordinary income.

  2. Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, so you don’t get an upfront tax deduction. However, the investments in the account grow tax-free, and qualified withdrawals in retirement are also tax-free. This can be advantageous if you expect your tax rate to be higher in retirement or if you want to have tax-free withdrawals.

Both traditional and Roth IRAs have annual contribution limits, which are set by the IRS and can change over time. These limits can vary depending on factors such as age and income. Additionally, there are rules and restrictions regarding when and how you can withdraw funds from an IRA without penalties.

IRAs can provide individuals with a way to save for retirement and potentially reduce their tax burden. It’s important to understand the specific rules and implications of each type of IRA before opening an account.