Individual Retirement Account (IRA)

An Individual Retirement Account, or IRA, is a financial account commonly used for individuals to save money for retirement. There are two primary types of Individual Retirement Accounts used today.

A traditional IRA is one where contributions to the IRA are deductible from adjusted gross income in the tax year the contributions are made to arrive at taxable income. This means that contributions to a traditional IRA are not taxed in the current tax year. Once the taxpayer retires and begins to withdraw money from the IRA, those withdrawals are taxed based on the taxpayer's marginal tax rate at that time.

A Roth IRA is one where contributions to the IRA are made using after-tax dollars, which means that contributions to the Roth IRA are taxed in the current tax year. Once the taxpayer retires and begins to withdraw money from the IRA, those withdrawals are tax-free.

The amount of money that an individual can contribute to an IRA each year is limited to $5,500 for those under the age of 50 and to $6,500 for those aged 50 and above. The contribution limit is the total for all of an individual's contributions, whether to Traditional or Roth IRAs. However, each member of a household can have their own IRA accounts, each of which has separate contribution limits.