What is an IRA?
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An individual retirement account (IRA) allows you to save money for retirement in a tax-advantaged way.
An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. The three main types of IRAs each have different advantages:
- Traditional IRA - You make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement. Many retirees also find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
- Roth IRA - You make contributions with money you’ve already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
- Rollover IRA - A Traditional IRA intended for money "rolled over" from a qualified retirement plan. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.
Why invest in an IRA?
Many financial experts estimate that you may need up to 85% of your pre-retirement income in retirement. An employer-sponsored savings plan, such as a 401(k), might not be enough to accumulate the savings you need. Fortunately, you can contribute to both a 401(k) and an IRA.
- Supplement your current savings in your employer-sponsored retirement plan.
- Gain access to a potentially wider range of investment choices than your employer-sponsored plan.
- Take advantage of potential tax-deferred or tax-free growth.
You should try to contribute the maximum amount to your IRA each year to get the most out of these savings. Be sure to monitor your investments and make adjustments as needed, especially as retirement nears and your goals change.
When you have earned income, you can contribute it to an IRA up to the maximum annual limit of $5,500. If you're 50 or older, you're allowed to contribute an additional $1,000. If you have more than one IRA, the total contribution to all your IRAs can't exceed the annual limit.