What is an IRA?

Bryan Pedersen
Bryan Pedersen
An IRA is used to save for retirement.
An IRA is used to save for retirement.

An IRA is an Individual Retirement Account, and it provides either a tax-deferred or tax-free way of saving for retirement. There are many different types of accounts within this category, depending on the financial goals and situations of each individual, though traditional and Roth IRAs are the most common choices.

A traditional IRA allows tax-deductible contributions of up to $4,000 US Dollars (USD) per year, or more if an individual is over age 50. Whatever the person contributes towards this account comes off his yearly income, thereby reducing his total tax liability. Once the money is withdrawn, however, it is subject to standard income taxes and an additional 10% penalty if withdrawn before the age of 59 1/2. An exception is made if the money is used for purchasing a house or to cover approved higher education costs. Standard income tax still applies, but the 10% penalty is waived. This provides a great investment tool with flexibility for important purchases.

Retirement involves financial planning.
Retirement involves financial planning.

Roth IRAs were created in 1997 to help middle-class Americans. They are not tax-deductible, but provide even greater flexibility than traditional accounts. Contributions can be withdrawn at any time without being subject to penalty or tax, though interest earned in the account is. After five years, both contributions and earnings in the account can be withdrawn without penalty or taxation. The same benefits concerning education and housing also apply as with the traditional IRA.

This type of retirement account isn't for everyone, though. Individuals who file taxes using single status are eligible for full contribution as long as they don't exceed $95,000 USD per year in earnings, and $110,000 USD for partial contributions. Joint filers face an earnings cap at $150,000 USD and $160,000 USD for full and partial contributions respectively. High-level corporate executives need not apply for this type of account.

Choosing IRAs can be complicated, depending on the financial situation, and may require the services of a certified financial planner. Another important decision may be whether or not to rollover a traditional one into the new Roth IRA. Generally speaking, if the person is eligible, contributing to a Roth account is always more advantageous due to the fact that income taxes will not apply later when the money is taken out, provided the person adheres to all the guidelines. Investors should be sure that there is enough time to absorb the costs of the rollover, however, since it will be taxed as if the person was taking the money out of the account.

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Discussion Comments

anon157856

I am 64, Retired and have no income other than what I withdraw from my Traditional IRA. I have some stock in a non-ira account. Can I sell that stock and put the max amount(5000 to 6000)in my IRA? Remembering that this is not earned income. --John

anon106121

I'm 27 years old and my 401K has been growing for about five years. I recently quit my job and moved to a new city to go to school. My financial planner says I can move my funds to an IRA, but what I really want to do is withdraw them and pay off credit cards and my car so I can pay for school. Should I wait to withdraw the funds until they are in an IRA? Given my age, I feel like I can still save significantly for retirement once I am done with school.

anon99491

to anon36643: Good job on starting early. 14 wow, but in order to invest in an IRA you must be employed full-time, by the way.

anon85521

anon60998: No, you wouldn't. I'm 25, too, and have a 401K--they are essentially the same thing. If you have a 401K through your employer, you are probably accruing more interest than if your money was housed in the form of an IRA. If you move companies, however, they probably won't hold your retirement. At that time, you would probably want to move your money to an IRA for safe-keeping to compile (a low amount of) interest.

anon82652

if there are no contributions made to the ira account, how does the value of the account increase?

anon78758

is it Individual Retirement Arrangement instead of Individual Retirement Account? can you kindly check?

anon78590

The reason your husband has to convert into an IRA or payout is because he no longer works for the company that opened up the account. Therefore there will be no more contributions from that company into the account. It would be like he would just be holding the money in that account. This is not beneficial to the company so they encourage ex-employees to move their money or pay it out.

anon63652

Why does the company my husband previously worked for want to make him put it in to a traditional IRA or pay his 401k out?

anon63365

is a 401(a) Defined Benefit plan the same as a traditional IRA, for tax purposes?

anon60998

My husband and I are 25 and both teachers. I have a 403 B and my husband has a 401 K set up. We only have a mortgage and two car payments (no other outstanding debt.). Do we need to set up an IRA along with our 403 B and 401 K?

anon45563

what happens to your ira when you die? how does your loved one get your money? do they get a check or do they have to get an ira?

anon42199

What is the most important thing one should know about an IRA?

What is a simple way of understanding what an IRA is about?

richrogers76

i am with anon6229. I'm 36, have a 401K but not much in it at all. I just deposited money in a Roth IRA and now don't know what to do. I have the money just sitting in the account and I guess I'm supposed to pick what stocks I want in it? How do I decide. I thought at the time just by funding the account someone (Ameritrade) would manage it. Help!

anon36643

Im 14, I still don't understand how the IRA works..

Do I just put money into the account and it builds over time or.. I don't know. tell me how this works

I want to invest money/save money, so in the future ill have extra cash on top of work to spend on things that I really want.

walkmolson

Trying to decide whether it makes sense to roll-over from a 401k... given the beating it's taken.

I'm 46, two kids 8 years from college, with little conventional savings, still trying to get out of debt built up in my 30's.

- Are IRA funds invested in the stock market? What generates the Interest?

- Is it possible to roll-over an IRA into a 401K later?

- If I'm planning on going back to school (yes, I'd be an old student), should I consider another short-term tactic?

mhaden

anon23751: I'd also check into your state's 529 plan to help save for college...if that's why your parents are putting money away for your kids. there are tax benefits for contributing, and they have age age-weighted plans that account for how long they have to save for college.

anon23751

parent wants to open ira accounts for my 5 kids do i start jointly or separately what's a good amount ages 8-19.

anon10387

I'm twenty three years young and have two little boys. If I don't have a savings account and I open up an IRA and I'm not supposed to touch it until a certain age, how can I get to my IRA for an emergency if I needed to?

anon6229

I'm 37 and don't have a savings account, 401k or an IRA. Is it too late to start saving for retirement? Should I get an IRA? Advice Please!!!

anon5171

My husband and I are building our house with money we borrowed from the Bank. Would it be wise for us to cash in our IRAs to pay for the Loan? And... How is our money used being in an IRA?

anon4388

If I was nineteen and I wanted to get an IRA, would I have to save all my money and put it into this account?

anon3291

Can i borrow from my IRA?

anon1160

Can you please tell me what is an Rptype for an IRA account?

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