What is an Individual Retirement Account (IRA)?
An Individual Retirement Account (IRA) is a type of savings account specifically designed to help individuals prepare for retirement. IRAs offer tax advantages, allowing contributions and, in some cases, investment earnings to grow tax-deferred or tax-free until retirement. There are several types of IRAs, including Traditional IRAs and Roth IRAs, each offering unique benefits and eligibility requirements.
Traditional IRAs allow individuals to make pre-tax contributions, which may reduce taxable income for the year. The funds within the account grow tax-deferred, meaning individuals pay taxes only upon withdrawal. These withdrawals are typically taxed as regular income once the individual reaches retirement age, currently set at 59½ to avoid early withdrawal penalties.
Roth IRAs, on the other hand, allow for post-tax contributions, meaning that the money is taxed before it goes into the account. However, the advantage is that qualified withdrawals, including earnings, can be made tax-free during retirement. This can be beneficial for those expecting to be in a higher tax bracket upon retirement.
IRAs are generally self-directed, meaning individuals have control over their investment choices, such as stocks, bonds, mutual funds, or other assets, depending on the financial institution. IRAs are ideal for individuals looking to supplement other retirement savings, such as a 401(k) or pension, and can play a crucial role in ensuring a comfortable and secure retirement.