An Individual Retirement Account (IRA) is a type of savings account that is designed to help individuals save for their retirement. IRAs are popular because they offer certain tax advantages that are not available with other types of savings accounts.
There are several types of IRAs, but the most common are traditional IRAs and Roth IRAs:
- Traditional IRA: With a traditional IRA, the money you contribute may be fully or partially deductible on your tax return, depending on your circumstances. The money in the account grows tax-deferred, meaning you don’t pay taxes on your investment gains until you make withdrawals during retirement. When you withdraw the money at retirement, it will be taxed as regular income.
- Roth IRA: With a Roth IRA, contributions are made with after-tax dollars, meaning there’s no immediate tax benefit. However, the big advantage of a Roth IRA is that the money grows tax-free, and you can make qualified withdrawals in retirement that are also tax-free.
Other types of IRAs include SEP IRAs (for self-employed people and small business owners) and SIMPLE IRAs (also for small businesses), among others.
The maximum amount you can contribute to their IRA is $6,000 per year, or $7,000 if you are age 50 or older. The actual amount may vary depending on your income, tax filing status, and other factors.