An individual retirement account (IRA) is a tax-advantaged investment account that helps you save for retirement. There are four popular types of IRAs — traditional, Roth, SEP and SIMPLE — and all offer tax benefits that reward you for saving. Investing in an IRA allows your money to grow and compound. An IRA is similar to a 401(k) account. However, the 401(k) plan is an employee benefit that can be obtained only through an employer. Money held in an IRA usually can't be withdrawn before age 59½ without incurring a hefty tax penalty of 10% of the amount withdrawn.
You can invest in stocks, bonds and other assets. How your account balance grows over time depends on how you invest and how much you contribute to the IRA. A 401(k) or pension may not provide enough retirement income. Putting the maximum contribution amount in an IRA can help you prepare for retirement, save on taxes and access investment options your workplace retirement plan might not offer.
Types of IRAs
A traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.
A Roth IRA is a tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax free.
A Payroll Deduction IRA plan is set up by an employer. Employees make contributions by payroll deduction to an IRA (Traditional or a Roth IRA) they establish with a financial institution.
A SEP is a Simplified Employee Pension plan set up by an employer. Contributions are made by the employer directly to an IRA set up for each employee.
A SIMPLE IRA plan is a Savings Incentive Match Plan for Employees set up by an employer. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions, and the employer makes matching or nonelective contributions.
A SARSEP - the Salary Reduction Simplified Employee Pension Plan - is a type of SEP set up by an employer before 1997 that includes a salary reduction arrangement.
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