An individual retirement account (IRA) is a type of retirement savings plan in the US, which offers tax benefits to the holder. The maximum contribution to all IRAs for a person under the age of 50 is capped at $5,000, and at $6000 for a person over 50.
There are two main types of IRAs:
- Traditional IRA: A contribution to a traditional IRA account allows individuals to deduct the contribution from their taxable income. For example: Person A earns $120,000 in a year and is in the 25% tax bracket. If he contributes $4000 to an IRA account, he does not have to pay taxes on that $4000, i.e. his tax liability decreases by $1000.
- Roth IRA
Other types of IRAs include: