An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.
The 3 main types of IRAs each have different advantages:
- Traditional IRA- You make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement. Many retirees find themselves in a lower tax bracket than pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
- Roth IRA- You make contributions with money you’ve already paid taxes on (after-tax). Your capital may grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
- Rollover IRA- You contribute money “rolled over” from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.
Whether you choose a traditional or Roth IRA, the tax benefits allow your savings to potentially grow or compound more quickly than in a taxable account.