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Individual Retirement Account  

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An Individual Retirement Account (IRA) is a type of savings plan, endorsed by the federal US government that offers tax advantages for individuals who set aside money for their retirement. Contributions to an Individual Retirement can be deducted from income tax (in whole or in part) depending on the type of Individual Retirement Account and the specific circumstances. Individual Retirement Account contributions are limited based on income.

A Traditional Individual Retirement Account can be opened by any individual, up to the age of 70.5 years, who has earned income. Contributions to a ROTH Individual Retirement Account cannot be deducted but qualified distributions are tax-free, there is no limit on the age of contributor, and amounts in a ROTH IRA do not have to be withdrawn. The main criterion for choosing between a Traditional and ROTH IRA is the expected tax rate at retirement. If your tax rate is going to be lower at retirement then receiving tax credits for contributions (Traditional IRA) tends to be the better choice but it does depend on the opportunity cost of the initial tax saving. If your tax rate is going to be the same or higher at retirement then receiving tax-free distribution (ROTH IRA) is the better alternative.

Related Terms: Portfolio Diversification - Asset Allocation - Common Stocks - Stock Market

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