What Is an IRA?

What Is an IRA?

An IRA is an individual retirement arrangement, but what does IRA really mean?

IRA Definition

An IRA is a tax-advantaged account used for retirement savings. IRAs are defined and governed by the IRS through Publication 590-A Contributions to Individual Retirement Arrangements, and Publication 590-B Distributions from Individual Retirement Arrangements.

Is An IRA a Good Way to Save for Retirement

Saving money in an IRA is smart. To know, “Is an IRA right for me,” depends on your financial situation and your retirement goal. An IRA is a great way to reduce taxes and to grow your money without paying taxes for years. There are actually several different types of IRAs such as Roth IRAs, SEP-IRAs and SIMPLE IRAs. The standard, or plain IRA is often referred to as a traditional IRA.

What Is an IRA? 1

What Is a Traditional IRA?

A traditional IRA allows taxpayers below a certain income threshold to deduct the value of contributions made to the IRA. The money also grows tax-free inside the IRA. Overall, the funds in a traditional IRA are considered tax-deferred because you will have to pay taxes on tax-deductible contributions and tax-free growth later when you withdraw the money.

How Does an IRA Work?

Opening an IRA is pretty simple. You pick a Custodian to hold your IRA account. This is typically a bank or brokerage. Everyone from your local credit union, to Fidelity and Schwab, and even Public and Robinhood offer IRA accounts. If you are using a professional financial advisor, they may open an IRA account for you with their brokerage firm such as Merrill Lynch, Northwestern Mutual, or Bank of America. To open an IRA, you fill out an application and make an initial deposit. From there, you choose your investments and make contributions as you see fit.

Will My IRA Contributions Be Deductible?

IRA contributions are deductible if your income is below a certain threshold. If your income is too high, you can still make contributions to a Traditional IRA and benefit from the tax-deferred growth offered in the IRA. If you do not deduct your contributions, you do not have to pay taxes on the contributions when you withdraw funds from your IRA.

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