Individual Retirement Account - IRA

Loading the player...

What is an 'Individual Retirement Account - IRA'

An individual retirement account (IRA) is 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."

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)?

RELATED TERMS
  1. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  2. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  3. Roth IRA

    An individual retirement plan that bears many similarities to ...
  4. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  5. IRS Publication 590: Individual ...

    A document published by the Internal Revenue Service (IRS) that ...
  6. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
Related Articles
  1. Professionals

    Individual Plans

    Individuals may set up a retirement plan for themselves that are qualified and allow contributions to the plan to be made with pre-tax dollars. Individuals may also purchase investment products ...
  2. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Individual Retirement Accounts (IRAs)

    What they are: An individual savings account with tax incentives. Pros: Tax benefits - investments grow tax-deferred and contributions may be deductible; variety of investment options ...
  3. Retirement

    Roth IRA Contribution Limits in 2016

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  4. Retirement

    Traditional IRAs: Eligibility Requirements

    By Denise ApplebyWho Can Establish a Traditional IRA?Any individual who has taxable compensation or self-employment income (earned by sole proprietors and partners) for the year, and will not ...
  5. Professionals

    IRA Rules and Regulations

    Series 6, IRA Rules and Regulations. In this section: IRA Contribution Catch-Ups, IRA Rollover and Transfer Rules, Penalties for Early Withdrawals from and Excess Contributions to IRAs
  6. Taxes

    Roth IRA Vs. Traditional IRA

    Learn more about the differences between a Roth IRA and traditional IRA.
  7. Retirement

    Funding Your IRA vs. Your Roth IRA, Which First?

    The answer depends on where you are in your career and personal life each year. Here are some scenarios and rules to think about.
  8. Professionals

    IRA Rules and Regulations

    FINRA/NASAA Series 26 Section 4 - IRA Rules and Regulations. In this section IRA contributions and catch-ups, rollover and transfers, penalties for early withdrawals from and excess contributions ...
  9. Options & Futures

    Roth IRAs: Conclusion

    Like the Traditional IRA, Roth IRAs are flexible, and they are a popular way for individuals to save for their retirement. Roth IRAs differ, however, because assets can grow on a tax-free basis. ...
  10. Retirement

    How Much It Takes to Max Out Your IRA

    IRAs have certain tax advantages that allow your nest egg to grow at a faster rate. But there are annual limits on how much you can contribute.
RELATED FAQS
  1. What is the difference between a ROTH, SEP and Traditional IRA?

    The Roth IRA was established in 1996 as the newest addition to the individual retirement accounts (IRAs) available to individuals. ... Read Answer >>
  2. Can an individual contribute to both a Roth IRA and a Traditional IRA in the same ...

    Yes, an individual can contribute to both a Roth IRA and a Traditional IRA in the same year. The total contribution into ... Read Answer >>
  3. What are the main differences between a Simplified Employee Pension (SEP) IRA and ...

    Discover the difference between a simplified employee pension IRA and a traditional IRA so that you can choose the best retirement ... Read Answer >>
  4. Can I have a self-directed IRA or Roth IRA using the forex market?

    In the U.S., one of the best ways for individuals to protect their income from taxes and save for retirement is by using ... Read Answer >>
  5. Can I hold multiple IRAs?

    IRAs are investments made to plan for retirement, which offer certain tax advantages, depending on the type, and often matching ... Read Answer >>
  6. How does an IRA grow over time?

    Learn how the magic of compounding helps grow individual retirement accounts, or IRAs. IRAs are one of the most proven options ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center