IRA - This stands for "Individual Retirement Account." There are many different types of IRAs: some are used for small businesses (SEP IRAs or SIMPLE IRAs) and some for individuals (Traditional IRAs and ROTH IRAs). What each of these have in common is that they are accounts that a person can put money from income into, and receive a tax benefit in return.
An IRA is a tax deferred account. For tax deferred accounts (Traditional IRAs, SEP IRAs, 401Ks, 403bs), money invested is then deducted from the contributor’s income in the current year, so the contributor pays lower taxes in that year. Then, contributions can grow and no taxes are owed on the gains or income until distributions begin in retirement (indeed there are penalties if a person tries to take money out of a retirement account before age 59.5). When distributions occur in retirement, the account owner will have to add the distributions to their income, and pay income taxes on the total amount.
ROTH IRAs are different in that contributions are made with after tax dollars, so there is no tax break in the year of the contribution. And, no taxes are owed when the account owner goes to take distributions in retirement. In summary, for a Traditional IRA, taxes are deferred until retirement. For a ROTH IRA, distributions in retirement are tax free.
Make sense? Ask me questions if you want more info.
An IRA is a tax deferred account. For tax deferred accounts (Traditional IRAs, SEP IRAs, 401Ks, 403bs), money invested is then deducted from the contributor’s income in the current year, so the contributor pays lower taxes in that year. Then, contributions can grow and no taxes are owed on the gains or income until distributions begin in retirement (indeed there are penalties if a person tries to take money out of a retirement account before age 59.5). When distributions occur in retirement, the account owner will have to add the distributions to their income, and pay income taxes on the total amount.
ROTH IRAs are different in that contributions are made with after tax dollars, so there is no tax break in the year of the contribution. And, no taxes are owed when the account owner goes to take distributions in retirement. In summary, for a Traditional IRA, taxes are deferred until retirement. For a ROTH IRA, distributions in retirement are tax free.
Make sense? Ask me questions if you want more info.
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