IRA Plan

DEFINITION of 'IRA Plan'

An IRA plan is an investment account individuals may establish to save for retirement. Generally, an IRA plan allows you to save money and defer taxes until you retire. IRA plans have annual contribution limits that are established by the government and rise gradually with inflation; individuals age 50 and older can make slightly higher "catch-up" contributions.

BREAKING DOWN 'IRA Plan'

Individual retirement account plans come in several forms including the traditional IRA and the Roth IRA for individuals, and the SEP IRA and the SIMPLE IRA for the self-employed (self-employed individuals may still use traditional or Roth IRAs). Each plan has different rules regarding taxation and withdrawals. The tax advantages of these types of accounts make them valuable as retirement savings tools.

IRA ABCs

Since being enacted by Congress in the Employee Retirement Income Security Act of 1974 (ERISA), the IRA has grown into one of the most popular tax-deferred savings accounts with over 43 million households owning an individual retirement account in 2016. With about one-half contributing to a regular IRA and the other half a Roth, the average account topped $100,000 in 2017. 

The earlier you start contributing to an IRA, the better. Compounding money is a snowball effect — investment returns can be reinvested and generate more returns, which are reinvested, and so on. The longer your money has to compound tax-free, the better off you are. And don’t be paralyzed if you can’t contribute the maximum amount.

And don't wait until the tax filing deadline to contribute. Many people contribute to their IRA when they file their taxes — on April 15th of the following year. When you wait, not only do you deny your contribution the chance to grow for as much as 15 months, you risk making the entire investment at a high point in the market.

You can invest your IRA in a vast array of instruments from stocks and bonds to mutual funds and ETFs that contain one or both or a combination of stocks and bonds. Be sure to look for investments with low expense ratios and fees. That way more of your money can go to work for you. 

You can even invest IRA money in real estate and other non-traditional assets including gold, silver, and rare coins. The rules on these investments can be complex, so it's wise to consult a financial advisor before placing IRA funds in non-traditional assets. 

Finally, make sure to name a beneficiary. If you fail to do so, the proceeds of your retirement account will be subject to probate fees — and, potentially, any creditors you have.