What Does IRA Stand For?

IRAs are individual retirement accounts, and they offer tax benefits to encourage people to save for retirement.
Elizabeth Ayoola
Andrea Coombes
By Andrea Coombes and  Elizabeth Ayoola 
Updated
Edited by Arielle O'Shea

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.


The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

MORE LIKE THISInvesting

IRA stands for individual retirement arrangement. That’s the official name given by the IRS, but most people think of IRAs as individual retirement accounts, and that’s exactly what they are.

While there are different types of IRAs, all of them are retirement accounts that offer tax benefits to encourage people to save for retirement. Almost all IRAs require you to have income from work. (The spousal IRA is an exception.)

Two of the most popular types of IRAs are the traditional IRA and the Roth IRA. With these two IRAs, you can contribute a maximum of $7,000 in 2024 ($8,000 if age 50 or older). For the 2023 tax year, you can contribute through the tax filing deadline in April of 2024.

Here’s more information on traditional IRAs and Roth IRAs:

AD

Get a custom financial plan and unlimited access to a Certified Financial Planner™

Custom financial plan tailored to your situation and goals
Access to a Certified Financial Planner™ via calls or messaging
Unbiased, expert financial advice for a low price.
CHAT WITH AN ADVISOR

NerdWallet Advisory LLC

Traditional IRA

With a traditional IRA, you may qualify to take a tax deduction in the year you make a contribution. If you put the annual maximum into a traditional IRA, and you qualify for the deduction, your taxable income will be reduced by that amount on your tax return.

So how do you know if you qualify for that traditional IRA tax deduction? Here’s how:

  • If you don’t have a retirement account at work, and your spouse (if you’re married) also doesn’t have a retirement account at work, then you can deduct your full traditional IRA contribution.

  • If you or your spouse has a retirement plan at work, then you’ll have to look at the traditional IRA income limits. These income limits prevent people with higher incomes from deducting some or all of their contributions to a traditional IRA if they also have a retirement plan at work.

The perk of tax-deferred savings comes with some other rules, too. If you withdraw money from a traditional IRA before age 59½, you’re likely to owe a 10% penalty plus income tax on that distribution. Find out more about IRA withdrawal rules.

Video preview image

» Read more about traditional IRAs

Advertisement
NerdWallet rating 

4.9

/5
NerdWallet rating 

5.0

/5
NerdWallet rating 

4.1

/5

Fees 

$0

per online equity trade

Fees 

$0

per trade

Fees 

$0

per trade

Account minimum 

$0

Account minimum 

$0

Account minimum 

$0

Promotion 

None

no promotion available at this time

Promotion 

None

no promotion available at this time

Promotion 

Get up to $700

when you open and fund a J.P. Morgan Self-Directed Investing account with qualifying new money.

Roth IRA

With a Roth IRA, you don’t get a tax benefit in the year you make your contribution. That means if you put the annual maximum into your Roth IRA this year, you can’t claim that contribution as a tax deduction on your tax return.

But with a Roth, your contributions grow tax-free — you never owe taxes on your investment gains if you let the money sit there until you’re at least 59½ years old (assuming you opened a Roth at least five years earlier — read more about Roth IRA withdrawal rules here). Because you didn’t take a tax deduction on the contributions, all of the money comes out of that account entirely tax-free in retirement.

Plus, with a Roth IRA, you can withdraw your contributions any time you like. This is money for your retirement, so the best thing to do is to leave the money invested until you retire. But if you absolutely need to tap your account, there are no rules, withdrawal penalties or taxes as long as you withdraw only what you’ve contributed. (If you withdraw investment earnings or interest, you’ll probably owe a 10% penalty and income tax on that money.)

Finally, it’s important to know that there are income limits on Roth IRAs. That means you can’t contribute to a Roth if your income exceeds the IRS limits. Check out the Roth IRA contribution limits.

» See our lists of the best IRA accounts and the best Roth IRA accounts

AD
Robinhood
NerdWallet rating 

on Robinhood's website

Get more smart money moves – straight to your inbox
Sign up and we’ll send you Nerdy articles about the money topics that matter most to you along with other ways to help you get more from your money.
Nerdwallet advisors logo

Get a custom financial plan and unlimited access to a Certified Financial Planner™. Unbiased, expert financial advice for a low price.

    NerdWallet Advisory LLC

    AD