Short for individual retirement account, an IRA allows you to save for retirement while taking advantage of tax benefits designed to encourage retirement savings.

Banks, brokers and other financial institutions offer IRAs, allowing account owners the option of investing in CDs, money market funds and other investments.

Types of IRA plans

Multiple IRA types exist, so here’s a glimpse at what each plan offers:

Traditional IRA: This account allows you to contribute on a tax-deferred basis. You pay no taxes on account funds until money is withdrawn in retirement. By contributing tax-deferred money, you can often deduct contributions from your taxable income.

Roth IRA: Unlike a traditional IRA, a Roth IRA is taxed as you make contributions. You don’t get a tax deduction immediately with a Roth IRA, but your investment grows tax-free, and any withdrawals you make in retirement are also tax-free.

SEP IRA: This specialized retirement savings account provides tax breaks for small-business owners and the self-employed. As with a traditional IRA, contributions are tax deductible.

Nondeductible IRA: Money in the account grows tax-free, but contributions cannot be deducted from income tax. Nondeductible IRAs are not common due to this restriction.

Spousal IRA: Allows working spouses to contribute to an IRA in the name of a nonworking spouse, provided that the working spouse’s income is equal to more than the total IRA contributions of both spouses.

SIMPLE IRA: A corporate retirement savings plan for small businesses with a hundred or fewer employees.

Self-directed IRA: An account where you pick the investments rather than a financial institution or broker.

Contribution limits

Traditional IRA contribution limits are $6,000 a year, or $7,000 if you’re older than 50 by the end of the year. All types of IRA plans have the same contribution limits as traditional IRAs.

How to open a traditional IRA

To open a traditional IRA, choose the bank or broker you want to work with and whose strategies fit your retirement plan. Open the account, and choose how much money you want to contribute each month.

How to open a Roth IRA

While you can open a Roth IRA through a bank or brokerage company, it’s recommended you use a financial advisor to open Roth IRAs. Roth IRAs have eligibility restrictions and income limits that can be confusing.

A financial advisor can help you make sense of these limitations and will have access to a wider range of investment opportunities than most banks.

The bottom line

Taking advantage of IRA tax benefits can help you grow your money for retirement, especially in combination with a 401(k) plan or other types of retirement plans, which you can read about here. Talk to a financial advisor to see if a traditional or Roth IRA is right for you.

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