| a savings plan that offers tax advantages to an individual depositor to set aside money for retirement. Abbreviation: IRA |
| individual retirement account n. Abbr. IRA An investment account in which a person can set aside income up to a specified amount each year and usually deduct the contributions from taxable income, with the contributions and interest being tax-deferred until retirement. |
A retirement plan. The “traditional” IRA allows individuals to contribute pretax earnings up to a maximum yearly allowance and to defer income taxes until the money is withdrawn after retirement. The “Roth” IRA allows individuals to contribute aftertax earnings and pay no taxes on future withdrawals. In contrast to a 401(k) plan, an IRA is funded entirely by the individual tax payer.
Individual Retirement Account - IRA
An IRA is a retirement investing tool that can be either an "individual retirement account" or an "individual retirement annuity". 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's contributions are made to SEP IRAs and SIMPLE IRAs.
Investopedia Commentary
Eventual withdrawal is taxed as income, including the capital gains, but since your income is likely to be less once you retire, you will be taxed at a lower rate. Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending upon an individual's income, they may be able to fit themselves into a lower tax bracket with tax-deductible contributions during their working years while still enjoying a low tax bracket during retirement.
Related Links
Introductory Tour through Retirement Plans
Avoiding IRS Penalties On Your IRA Assets
Traditional IRA Deductibility Limits
Taking Penalty-Free Withdrawals From Your IRA
Supplementing Your Retirement Income with IRAs
See also: Extended IRA, Income Tax, Roth IRA, RRSP, SEP, SIMPLE, Traditional IRA
Also spelled: IRA