Individual Retirement Account - IRA

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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."

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BREAKING DOWN '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)?

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    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
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  3. Can my child have an IRA/Roth IRA?

    One of the best assets a person can have is an individual retirement account (IRA), and children can have one as long as ... Read Full Answer >>
  4. What is the difference between taxable income and gross income?

    Gross income includes all of the income a person receives during a year that is not explicitly exempt from taxation, whereas ... Read Full Answer >>
  5. When can benefits be received from a provident fund?

    Like most retirement savings vehicles, participants in provident funds are eligible to receive benefits at retirement. However, ... Read Full Answer >>
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    Regular IRA contributions must be made in cash. Contributions of securities are not allowed. Internal Revenue Code Section ... Read Full Answer >>
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    The answer to this depends on an individual's investment goals, requirements and risk tolerance. During the 1990s, the majority ... Read Full Answer >>
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    IRA owners can make penalty-free distributions to buy a first home for themselves, their spouses, children, grandchildren ... Read Full Answer >>
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    There is an added incentive for adding to your retirement nest egg, if your income falls within certain limits. Under this ... Read Full Answer >>

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