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What is an IRA?

What Is an IRA?

 

                An individual retirement account (IRA) allows you to save money for retirement in a way that is an advantage for your taxes. An IRA account is set up at a financial institution and allows you 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 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.2
  • 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.

                Whether you choose a Traditional or Roth IRA, the tax benefits allow your savings to potentially grow, or compound, more quickly than in a taxable account.

                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. An IRA can help you:

  • 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. The limit for IRA contributions set by the IRS is $5,500 for the 2017 tax year, with an additional $1,000 catch-up contribution allowed if you're over 50.

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