walletIn 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.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”