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. I have some stocks in a taxable account. ...
    Retirement

    I have some stocks in a taxable account. ...

  2. Tips On How To Use IRAs To Boost Retirement ...
    Retirement

    Tips On How To Use IRAs To Boost Retirement ...

  3. Is it wise to put an IRA account into ...
    Retirement

    Is it wise to put an IRA account into ...

  4. 11 Things You May Not Know About Your ...
    Taxes

    11 Things You May Not Know About Your ...

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center