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Individual Retirement Account (IRA)

What is an Individual Retirement Account (IRA)?

An individual retirement account, or IRA, is an investment account in which you buy and sell securities like stocks, bonds, and mutual funds. IRAs have special tax benefits that help you save for retirement.

There are two types of IRAs with different tax benefits. Traditional IRAs can either be funded with pretax or aftertax money, depending on whether the saver is eligible to deduct the contribution. The earnings and any portion of the contributions that were not subject to income tax will be taxable when taken out in retirement. Roth IRAs are funded with aftertax dollars and the money you withdraw in retirement is tax-free. Both account types have rules governing withdrawals.

The choice between a traditional or Roth IRA often centers on minimizing your taxes. Investors should consider whether they’re in a lower tax bracket now, or whether they will be in retirement. If you’re just starting your career and expect to make more money later, you’ll want a Roth IRA so you can pay taxes now, while at the lower rate. The opposite applies for a Traditional IRA, where you’ll want to defer taxes now and pay them in retirement. If you’re unsure what the future holds, you can always contribute to both types and diversify your tax exposure in retirement.

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