An IRA (Individual Retirement Account) can be thought of as an individual savings account that has tax benefits. You open an IRA for yourself (that's why it's called an individual retirement account) and if you have a spouse, you'll each have a separate account. An important distinction to make is that an IRA is not an investment itself; rather, it is an account where you keep investments such as stocks, bonds and mutual funds. You get to choose the investments in the account, and can change the investments if you wish. Your return depends on the performance of the investments held in the IRA account. An IRA continues to accumulate contributions and interest until you reach retirement age, meaning you could have an IRA for decades before making any withdrawals.

IRAs are defined and regulated by the IRS, which sets eligibility requirements, limits on how and when you can make contributions, takes distributions, and determines the tax treatment for the various types of IRA accounts.

For example, as of 2014, the maximum you can contribute each year to your traditional or Roth IRA is $5,500 ($6,500 if you're age 50 or older) or your taxable income for the year, whichever is lower. Traditional IRA regulations allow you to take early withdrawals under certain circumstances, Roth IRA regulations are more flexible allowing you to withdraw contributions at any time, as long as you do not withdraw any of the interests earned (otherwise penalties apply).

Certificates of Deposit, on the other hand, are savings instruments issued and administered by banks, credit unions and brokers. Unlike IRAs, a CD can be jointly owned; for example, you and your spouse or you and your child could own a CD together. CDs pay a specified rate of interest over a defined period of time, and repay your principal at maturity, so you know ahead of time how much you will earn over the life of a CD. CDs can be issued in any denomination, and maturities typically range from one month to five years or longer; however, if you make a withdrawal from a CD before its maturity date, you'll owe a penalty. They are FDIC-insured if they are issued by an FDIC-insured bank.

  1. What are the differences between a 401K and an IRA?

    When employers want to give employees a way to save for retirement, they may offer participation in a 401(k), a retirement ... Read Full Answer >>
  2. How can I start an IRA for my child?

    The Roth IRA is hands-down the most attractive retirement plan available for people with at least 15 or more years until ... Read Full Answer >>
  3. What is the size of the average retirement nest egg?

    According to a 2015 Government Accountability Office (GAO) study, people between the ages of 55 and 64 with any retirement ... Read Full Answer >>
  4. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  5. How does a Roth IRA grow over time?

    Your Roth IRA account grows over time thanks to two funding sources: contributions and earnings. While your contributions ... Read Full Answer >>
  6. Can my 401(k) be seized or garnished?

    As long as your retirement funds are held in your 401(k) and you do not take them as distributions, your 401(k) cannot be ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  2. Mutual Funds & ETFs

    What Target-Date Funds Can Teach About Investing

    Target-date funds are a popular way to invest for retirement. Here's what they can teach the novice investor.
  3. Investing Basics

    How to Use Boring CDs to Diversify

    Markets are volatile and are in for more punishment. CDs can help investors earn some interest while they're waiting out the storm.
  4. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  5. Professionals

    How to Protect Retirement and Help Adult Kids

    Parents can both protect their retirement money and help their adult kids. Here's how.
  6. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  7. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  8. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  9. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  10. Professionals

    3 Benefits of Working Longer (and Retiring Later)

    There are many reasons why folks in their 60s may want to keep working until at least age 70. Here are three.
  1. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
  2. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  3. Individual Retirement Annuity

    A retirement investment vehicle that is structured similarly ...
  4. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  5. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  6. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!