Individual Retirement Account (IRA)

An individual retirement account (IRA) is a retirement investment tool. An individual retirement account is a retirement plan account that provides some tax advantages for retirement savings in the United States. There are several types of IRAs like:- traditional IRAs, Roth IRAs, simple IRAs and sep IRAs.

An IRA can only be funded with cash or cash equivalents. Once money is inside an IRA, the IRA owner can direct the custodian to use the cash to purchase most types of securities, and some non security financial instruments. Funds can be distributed from an IRA at any time, however there are limited circumstances when money can be distributed, or withdrawn from the account, without penalties. Money can typically be withdrawn penalty free as taxable income from an IRA once the account owner reaches age 59 and a half.

Traditional and Roth IRAs are established by individual taxpayers, in which individual taxpayers are allowed to contribute 100% of compensation up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax-deductible it depends on the taxpayer's income, tax-filing status, and coverage by an employer-sponsored retirement plan. While on the other hand Roth IRA contribution is not tax-deductible.

Eventual withdrawals from traditional IRAs are treated as ordinary income and may be subjected to income tax. However, since the income of a person is likely less once he retires so he may be taxed at a lower rate. Extended IRA is an IRA that allows the second-generation beneficiary to continue distributing the assets over the life expectancy used by the first-generation beneficiary. So it extends the IRA.

Roth IRA is also an individual retirement plan which bears many similarities with the traditional IRA. Contribution is never deductible, and qualified distribution is tax-free. Some economists argue that a Roth IRA is more advantageous than a Traditional IRA.