Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Individual Retirement Account (IRA)

What it is:

An Individual Retirement Account (IRA) is a government sponsored, tax-deferred personal retirement plan. 

How it works (Example):

An IRA can also be referred to as a Traditional IRA.

In order to open an IRA, an individual must first establish an account with a bank, brokerage firm or mutual fund company. These firms then act in the capacity of a fiduciary. The individual is responsible for establishing the IRA and selecting the plan investments. Once the account has been established, the individual can contribute a maximum of several thousand dollars per year into an IRA. The IRA plan, which was established in 1974 by Congress, has been an extremely popular retirement savings plan for workers for over thirty years.

Taxes on Traditional IRA contributions and earnings are deferred until the account owner takes a distribution from the IRA. When money is withdrawn from a Traditional IRA it is taxed as regular income. Withdrawals are typically made when or after the plan owner has reached the age of 59 1/2. If the plan owner withdraws money from the account prior to retirement age, then he/she will incur a 10% penalty payable to the IRS (unless specific circumstances apply).

Why it Matters:

An IRA is among several options Americans have when planning for retirement. The best option differs from one individual to another, so it is important for those planning for retirement to consider all of their options. To view an article going more in depth on IRAs as well as shedding light on a similar plan, a Roth IRA, click here.

Related Terms View All
  • Life-Plus-Ten Option
    To understand how this works, let's assume you'd like to invest in an annuity that, after...
  • Obligation Bond
    The face value of an obligation bond is usually larger than the value of the property...
  • Market Letter
    Market letters offer advice to investors interested in investing in a particular market...
  • Par
    Let's assume Company XYZ issues $10 million in bonds to the public. It may do so by...
  • Pale Recession
    Former Federal Reserve Chairman Alan Greenspan coined this term in a 2008 television...