IRA

Financial Dictionary -> Investing -> IRA

An Individual Retirement Account or Arrangement (abbreviated as IRA) is a United States specific retirement account, which helps people save for old age and retirement in the US. An IRA has several tax advantages due to the nature of the savings.

The term IRA is quite broad as there are many retirement plans out there (some provided by employers and others set up by the individual) and there is nothing stopping somebody opening other types of account specifically for retirement savings. That being said the main types of IRA are listed and explained below:

Regular or Traditional IRA:
Usually with a traditional IRA contributions are allowed for in tax, where payments are made before being charged tax or pre taxed assets are used. There is no tax on interest; however when the money is taken out at retirement income tax must be paid.

Roth IRA:
Named by and after Senator William Roth, the Roth IRA is made only with post tax assets, and all transactions are tax free, as well as withdrawals themselves.

SEP IRA:
This is simply a method of allowing an employer to make contributions to your traditional IRA, instead of a company pension account or similar.

Simple IRA:
This is just a simple employee pension plan where both employer and employee can pay in to the account with ease. There are typically lower contribution limits (the amount you can deposit) than on other savings plans.

Self Directed IRA:
This means instead of making contributions and gaining interest on unseen investments etc, the account holder actually makes their own investments. This is rare and is only usually held by those that trade regularly anyway.

There are certain limits that apply to IRA accounts, although generally you are allowed to contribute 100% of your annual income or $5,000, depending on which is less for the individual. However if you only deposit say $1,000 one year, you can make up for it the next.