What is an IRA, anyway?


What is an IRA, anyway?

IRA means personal retirement account. It’s one of the many ways to save money for the future, and its popularity is growing প্রায় about one-third of households owned by the IRA in 2019.

But how do IRAs work? Great question.

Some people think an IRA is an investment, but it is actually an account that holds Lots Investments can pack your IRA stocks, bonds, mutual funds and more. This can give your money a better chance to grow than a regular savings account.

There are two different types of IRAs: traditional theatrical and chariot. The difference between them is warm on two important issues: taxes and withdrawal penalties.

When you contribute to a traditional theoretical IRA, you deduct those contributions from your total income when you pay your taxes. Next, when you make a withdrawal – known in the financial world as “distribution receipts” – you pay regular income tax on the amount of money you receive.

If you start withdrawing up to 59 years, you will not pay any penalty. The half-birthday gift isn’t as bad as it goes, but the waiting time can be limited-if you withdraw before the age of 59½, there will be an additional 10% penalty unless you qualify for the exception.

With Roth IRA, it works the other way around-you pay income tax on the money you keep in the account, but then all your withdrawals are tax-free, including any earnings.

Also, whenever you contribute money you can withdraw it without taxes or fines, so there is no need to wait for that half-birthday. Unless you’re excited about turning 59, which we fully understand.

No matter what type of IRA you choose, it will not interfere with your employer-sponsored planning. This gives you more freedom to find the right fit.

Check out our resources on the web to learn more and compare chariots and traditional theatrical IRAs. When you are enjoying 59½ and all the years thereafter, you will be happy.

Important information:

All investments are at risk, including the potential loss of money you invest.

IRA ownership figures come from the Investment Company Institute ICI research perspective, December 2019, Volume 25, No. 10. “The Role of the IRA in US Households of Saving for Saving, 2019.”

© 2020 The Vanguard Group, Inc. All rights reserved.

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