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What Does IRA Stand For?

IRAs are individual retirement accounts, and they offer tax benefits to encourage people to save for retirement.
Feb. 21, 2020
Investing, IRA, Personal Finance, Roth IRA
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IRA stands for individual retirement arrangement. That’s the old-school, official IRS parlance, 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 $6,000 ($7,000 if you’re age 50 or older). That annual maximum is the same in 2020 and 2019.

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

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 of $6,000 into a traditional IRA, and you qualify for the deduction, your taxable income will be reduced by $6,000 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.

» Read more about traditional IRAs

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 $6,000 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 for retirement. 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. (Keep in mind that if you withdraw investment earnings or interest, you’ll likely 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.

» Read more about Roth IRAs

Here are some of our top picks for traditional IRA and Roth IRA accounts:

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Trade Fee

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$0.00

Account Minimum

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Up to $600

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cash credit with qualifying deposit

Management Fee

0.25%

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» See our complete list of top picks for best IRA accounts

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