What Is an IRA?

An IRA (Individual Retirement Account) is a type of investment account that is made specifically for retirement. You can invest the money inside the account any way you want, but it’s simply a type of account that the government designates is only for retirement. There are two basic types of IRAs – a traditional IRA and a Roth IRA.

The traditional IRA is tax deductible when you contribute the money, meaning you get a tax deduction up front, and then it grows tax deferred for all of those years. When you take the money out, the entire withdrawal is taxed at your ordinary income tax rate in most cases. This includes your initial contribution, growth, dividends and interest.

A Roth IRA is the exact opposite. While the traditional is taxed at the end, you make after-tax contributions to a Roth IRA and never pay another dime of tax on that money, under most circumstances. With the growth being tax-free on a Roth IRA, this is often the better choice for a young person who has many years for the investment to grow. Their tax rate is often lower currently than it will be later on in life, so the initial deduction you receive with a traditional IRA is likely not as valuable as being exempt from the tax on all the growth. If, instead, you’re later in your career and don’t have as long until retirement, then the traditional IRA may be a better choice for you.

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Steve Marbert is a CFP® and the President of Richard Young Associates, and is a Dave Ramsey SmartVestor Pro. Want to learn more about him and our other advisors? Find out more here.