- IRAs have annual contribution limits and come in two types- Roth IRAs invest after-tax dollars now to avoid taxation on gains later (at retirement) and have income-eligibility requirements- Traditional IRAs invest before-tax dollars now and defer taxes until withdrawal (at retirement) and can be used by anyone with sufficient earned income during the tax year
An individual retirement account is what helps you save for retirement! There are many types of IRAs, but what they all have in common is that they help individuals accumulate money in a tax smart manner to spend later in life during retirement.
An IRA works by allowing you to invest your money in stocks, bonds and other assets. You will then be able to withdraw this money later in life when you retire or need it for some other expense that has come up.
The federal government understands the importance of saving for retirement. They do this by having the tax code allow individuals to fund tax-advantaged investment vehicles for holding retirement investments.
This broader range of options helps individuals have a chance to diversify their investment portfolios by investing in more than the usual fare included in most employer-sponsored plans (i.e., mutual funds or target date retirement products).
IRAs have annual contribution limits that require you to earn income in order to contribute. For 2020 and 2021, the maximum contribution an individual can make is the lesser of $6,000 ($7,000 if age 50 or older) OR your earned income.