Individual retirement account

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An individual retirement account (IRA) is a personal savings plan which allows you to invest or set aside money for retirement, while offering you deferred tax / tax advantages.[1] These are technically known as "defined contribution" plans, since (unlike a traditional pension, or "defined benefit" plan) the only known amount is how much is contributed, there is no guarantee of any specific level of income at withdrawal (and could lose some or even all of its value).

There are two types of IRA's: traditional and Roth.

  • In a traditional IRA, the contributions are not taxed (they are either taken out of a paycheck and set aside in an account prior to tax withholding, or by individual contributions to an account which are deductible from taxable income except at higher taxable income levels), but the amounts are taxed (along with earnings on them, if any) when withdrawn.
  • In a Roth IRA, the contributions are taken from post-tax dollars, but only earnings on the IRA (if any) are taxed upon withdrawal (the remainder of the withdrawal is not taxed).[2]

IRA's can be individual plans offered by financial firms, or can also be offered by employers. An IRA can either be professionally managed (which is the most common, such as the purchase of a mutual fund) or "self-directed" similar to a traditional savings or stock brokerage account. Although there are bloggers who make suggestions as to how to manage a self-directed fund, their advice is often questionable, since the Internal Revenue Code and Treasury regulations restrict who can serve as a custodian and what types of assets can be placed in a Roth IRA. A non-bank trustee or custodian must obtain the prior written approval of the IRS before opening Roth IRA or other such accounts, and the IRS publishes a list of approved nonbank trustees or custodians.[3]

In addition, under Internal Revenue Code Section 408(m), IRAs (whether professionally managed or self-directed) cannot invest in collectibles (e.g. art, antiques, gems, coins, or alcoholic beverages), and can invest in certain precious metals only if they meet specific requirements. The most common investments in an IRA are securities (individually or via mutual funds) along with savings accounts and certificates of deposit. Some IRA's allow investments in real estate as well as life insurance annuities.

The most common retirement account offered by employers is a 401k plan (named for the applicable IRS code section). In the educational and non-profit world, a 403b plan works generally the same way, with some minor differences. Under such a plan, individuals can set aside either a set percentage or set amount each paycheck (limited to maximum amounts by the IRS) which (depending on the plan) can be traditional, Roth, or both. The employer commonly matches a portion of the amount, but is not required. Persons age 50 or older can, in some cases, set aside "catch up" contributions (again, limited to IRS maximums) which are not matched. The amounts can be invested either in company stock or in other types of investments such as mutual funds. One of the largest employer-sponsored retirement plans is the Thrift Savings Plan (TSP), which is for United States government and military personnel, and offers both traditional and Roth IRA options.

Generally a person cannot withdraw funds from an IRA prior to age 59 1/2 without incurring a 10% withdrawal penalty (on top of taxes), and must begin withdrawals beginning at age 70 1/2 (in minimum amounts based on IRS life expectancy tables).

Further reading


  • Daryanani, Gobind (1998). Roth IRA Book: An Investor's Guide: Including a Personal Interview with Senator William V. Roth, Jr. (R-De), Chairman, U.S. Senate Finance Committee. Bernardsville, NJ: Digiqual Inc.. ISBN 0-9665398-1-8. OCLC 40340829. 


  • Merritt, Steve (1998). All about the New IRA, Roth, Traditional, Educational: How to Cash in on the New Tax Law Changes. Melbourne, FL: Halyard Press. ISBN 1-887063-07-2. OCLC 39363078. 




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