Calculator and pen on top of IRA returns chart

What is an IRA?

As you grow older, you'll want to invest your money into an individual retirement arrangement (IRA). These accounts are set up at financial institutions and allow people to save for retirement with tax-free growth. This account is also tax-deferred, which means you won’t be charged taxes on the funds in the account until you begin to make withdrawals.

There are three main types of IRAs:

  • Traditional IRA: This type of IRA account allows you to make contributions with money you can deduct from your tax return, meaning these accounts are tax-deferred until you begin to withdraw from them during retirement.
  • Roth IRA: This type of IRA account allows you to make contributions with money that has already been taxed. This means that the money is tax-free when you begin to withdraw it during retirement.
  • Rollover: This is a Traditional IRA when money rolls over from another retirement plan such as a 401(k) or a 403(b).

Both a Traditional and Roth IRA will grow due to tax benefits. These types of savings tend to compound very quickly compared to a taxable savings account. Whether you wish to begin a Traditional or Roth IRA will usually depend on your personal financial situation. There are several different tools available to help you determine which to choose.

One such tool is offered by Fidelity. This short questionnaire will tell you whether you should begin contributing to a Traditional or Roth IRA. It will also tell you how much you should contribute and how much you will have saved by retirement. 

You might question why you should invest in an IRA. You’ll get Social Security Income when you retire, so why should you bother? You may even have a 401k set up already as well. Social Security Income is generally used as supplemental income after you’ve retired, so ideally you should have income from multiple different sources. Additionally, an employer-sponsored 401k may not even provide enough money after you’ve retired. Because of this, it is important to set up an IRA to ensure financial security when you choose to retire. You can contribute to both a 401k and an IRA for optimum security. 

Last Updated: July 15, 2016

Have more questions? See more answers from Alot.