What Exactly Is an IRA?

An Individual Retirement Account (IRA) is a type of savings account that allows individuals to save for retirement on a tax-advantaged basis. IRAs are offered by financial institutions such as banks, brokerages, and mutual fund companies.

There are two main types of IRAs: Traditional and Roth. Traditional IRAs allow individuals to make tax-deductible contributions, which means that the money you contribute reduces your taxable income in the year you make the contribution. The money in the account grows tax-deferred, which means you don’t pay taxes on any earnings until you withdraw the money in retirement. Roth IRAs, on the other hand, allow individuals to make after-tax contributions, which means you don’t get an upfront tax deduction for your contributions. However, the money in a Roth IRA grows tax-free, and withdrawals in retirement are also tax-free.

There are contribution limits for IRAs, which vary depending on the type of IRA you have and your age. Additionally, there are penalties for withdrawing money from an IRA before age 59 1/2, although there are some exceptions.

Overall, an IRA can be an excellent tool for saving for retirement on a tax-advantaged basis, and there are different types of IRAs available to suit different needs and situations.