Individual Retirement Account - IRA

AAA

DEFINITION of 'Individual Retirement Account - IRA'

An investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.

Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax deductible depending on the taxpayer's income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.

SEPs and SIMPLEs are retirement plans established by employers. Individual participant contributions are made to SEP IRAs and SIMPLE IRAs.

Also referred to as "individual retirement arrangements."

INVESTOPEDIA EXPLAINS 'Individual Retirement Account - IRA'

With the exception of Roth IRAs, where eligible distributions are tax-free, eventual withdrawal from an IRA is taxed as income; including the capital gains. Because income is likely to be lower after retirement, the tax rate may be lower. Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending on income, an individual may be able to fit into a lower tax bracket with tax-deductible contributions during his or her working years while still enjoying a low tax bracket during retirement.

 

To learn more about saving for retirement, check out What's the difference between an individual retirement account (IRA) and a certificate of deposit (CD)?

RELATED TERMS
  1. Stretch IRA

    An estate planning concept that is applied to extend the financial ...
  2. IRA Transfer

    The transfer of funds from an Individual Retirement Account (IRA) ...
  3. Extended IRA

    An IRA that allows a second generation beneficiary to continue ...
  4. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  5. Roth IRA

    An individual retirement plan that bears many similarities to ...
  6. Simplified Employee Pension - SEP ...

    A retirement plan that an employer or self-employed individuals ...
Related Articles
  1. Retirement

    I have some stocks in a taxable account. Can I use them to fund my Roth IRA instead of using cash?

    Regular IRA contributions must be made in cash. Contributions of securities are not allowed. Internal Revenue Code Section § 219(e)(1) and IRS Publication 590 provide detailed information about ...
  2. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  3. Retirement

    Is it wise to put an IRA account into a fixed or variable annuity?

    The answer to this depends on an individual's investment goals, requirements and risk tolerance. During the 1990s, the majority of seasoned financial planners would tell you that it's not a wise ...
  4. Taxes

    11 Things You May Not Know About Your IRA

    These little-known features will help you get the most out of your retirement savings.
  5. Retirement

    Traditional IRA Deductibility Limits

    Find out where you can take a tax deduction on the contributions you make.
  6. Professionals

    Designations No Retirement Planner Should Be Without

    Advance your career and gain clientele by adding a few choice certifications.
  7. Taxes

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  8. Retirement

    Not All Retirement Accounts Should Be Tax-Deferred

    It may be better to leave your assets exposed to the tax man when you're saving to retire.
  9. Options & Futures

    Write Covered Calls To Increase Your IRA Income

    Covered calls may require more attention than bonds or mutual funds, but the payoffs can be worth the trouble.
  10. Taxes

    Designating A Minor As An IRA Beneficiary

    Leaving liquid assets like cash or securities to minors can be a complicated procedure. Make sure you understand how your gift will be distributed, managed and taxed.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center