An IRA is a retirement investing tool that can be either an "individual retirement account" or an "individual retirement annuity". There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.
Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100% of compensation (self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and coverage by an employer-sponsored retirement plan.
Roth IRA contributions are not tax-deductible. SEPs and SIMPLEs are retirement plans established by employers. Individual participant's contributions are made to SEP IRAs and SIMPLE IRAs. IRAs are also referred to as "Individual Retirement Arrangements."Eventual withdrawal is taxed as income, including the capital gains, but since your income is likely to be less once you retire, you will be taxed at a lower rate.
Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending upon an individual's income, they may be able to fit themselves into a lower tax bracket with tax-deductible contributions during their working years while still enjoying a low tax bracket during retirement.
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