Individual Retirement Accounts (IRAs)

Individual retirement accounts (IRAs) help you save money for retirement when you’re employed. They offer tax advantages so you can put away more money for your future. From contribution limits and tax deductions to rollovers and conversions, here’s what to know about both Roth and traditional IRAs.

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Everything You Need To Know About IRAs

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Frequently Asked Questions
  • What are individual retirement accounts (IRAs)?

    Individual retirement accounts (IRAs) are retirement savings accounts that individuals who are employed use to save and invest. Different types of IRAs offer different tax advantages. Money in an IRA is invested, which allows it to potentially grow in value over time.

  • When did individual retirement accounts begin?

    Individual retirement accounts (IRAs) were first introduced in 1974 via the Employee Retirement Income Security Act (ERISA). They were at first only offered to workers who did not have pensions, but in 1981, the government made them eligible for all workers and spouses.

  • What are the different types of individual retirement accounts?

    There are several different types of individual retirement accounts (IRAs), including traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and rollover IRAs. All have different tax advantages that benefit different people based on their work situations.

  • Who is eligible for an individual retirement account?

    You’re eligible for an individual retirement account (IRA) if you have what the IRS determines as “earned income”—wages, salary, tips, commissions, self-employment income, or non-taxable combat pay. If you do not have earned income but are married to someone who does, you may be eligible for an IRA. Even if you have an employer-sponsored retirement account, you can have an IRA.

  • How are IRAs taxed?

    Investment income earned in both a traditional and Roth IRA grows tax-free. Your withdrawals from a traditional IRA are taxed in retirement, but the contribution amounts can be deducted, lowering your taxable income in the year you made the contribution. The amount of tax owed on withdrawals in retirement depends on your tax bracket and any tax deductions you claimed. The money contributed to a Roth IRA is made with after-tax dollars (no tax deduction), but you don't pay taxes on distributions or withdrawals in retirement.

  • How many IRAs can you have?

    You can have multiple IRAs—there is no limit. You can have more than one traditional or Roth IRA or a mix of both. However, the contribution limit for the year applies to all of your IRAs, not each one individually. So if you have two IRAs, you can still only contribute up to the maximum amount for that tax year.

  • How do inherited IRAs work?

    If you inherit an IRA from your spouse, you can become the account owner of the IRA, roll it over into another IRA you own, or act as a beneficiary and make a plan to take distributions. If you inherit an IRA from someone else, you will have to make a plan to take distributions. Inherited Roth IRAs generally need to be distributed. They can be treated as your own only if you’re the spouse of the deceased.

  • How do you open an IRA?

    You can open an IRA at any time. Banks and brokerage firms often offer IRAs, so look around to find an institution you trust. You can open a new IRA with money that you roll over from an existing retirement account, or you can start it with money that you transfer from your checking or savings account. When choosing an IRA, consider minimum balance requirements, account costs or fees, and more.

Key Terms

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