In the tax world, “IRA” stands for “individual retirement account.”
An IRA is a way for people to save for retirement. You can put up to $5,500 into an IRA if you’re under age 50, and up to $6,500 if you’re over age 50.
Deposits into an IRA are generally tax deductible. It depends on your income and whether or not you’re covered by a retirement plan anywhere else (for example, if you work a day job that provides a 401(k) plan).
Note also that only deposits into a traditional IRA are deductible. Deposits into a Roth IRA are not tax deductible. (I’ll give Roth IRAs their own blog post in the weeks to come.)
Money invested in an IRA grows tax-free until you withdraw the money. So from year-to-year, the investment earnings are not taxable as long as you don’t withdraw the money.
Withdrawals from an IRA are taxable unless you have after-tax basis in the IRA (a discussion of after-tax basis is a different blog post for a different day). You may also be hit with a 10% early withdrawal penalty on your tax return if you withdraw money from the IRA before you reach age 59 1/2.
For more tax terms, check out the Glossary page on this site.
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