What Does IRA Mean?

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An Individual Retirement Arrangement (IRA) provides a tax-advantaged way to save for retirement. Contributions to IRAs may be tax-deductible, grow tax-deferred and can be used to provide retirement income or an estate for your heirs, depending on the type of IRA.

Types

Individuals may establish and fund traditional or Roth IRAs, or participate in SEP or Simple IRA plans established by an employer who may elect to make contributions as well.

Function

Contributions to an IRA are invested according to your direction, often in stocks, bonds or mutual funds. Earnings on investments are not taxed until you withdraw funds, or not taxed at all in the case of the Roth IRA.

Features

Traditional IRA contributions are not taxed, but you will pay taxes when you take money in retirement. Roth IRA contributions are made with after-tax dollars, but withdrawals are tax-free.

Considerations

You must begin taking required minimum distributions from most IRAs at age 70 1/2, regardless of whether you need the money. This may affect the amount you leave to your heirs.

Warning

Except in certain instances, such as the purchase of a first home, if you withdraw money from an IRA before age 59 1/2, you will pay a 10 percent penalty, as well as ordinary income taxes.

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