IRA (Individual Retirement Account)
An IRA is a tax-favored investment account. You can use the account to invest in stocks, bonds, mutual funds, ETFs, and other types of investments after you place money into it, and you make the investment decisions yourself unless you want to hire someone else to do so for you. You might consider investing in an IRA if your employer doesn't offer a retirement plan or if you've maxed out your 401(k) contributions for the year.
You contribute up to $6,000 in 2019. This increases to $7,000 if you're age 50 or older. This limit is up from $5,500 in 2018. You'll pay no taxes annually on investment gains, which helps them to grow more quickly.
Many taxpayers can deduct their IRA contributions on their income tax returns if they don't also have a 401(k) retirement account at work, reducing their taxable incomes for that year. Some restrictions exist based on income. You pay income taxes on the income you contributed and on gains when the money is withdrawn in retirement.
You can buy and sell investments within the IRA, but if you try to take money out before you reach age at 59½, this is known as an early distribution and you'll probably have to pay a 10 percent penalty fee, just as you would with a 401(k). You'll also be subject to federal and state and income taxes on the withdrawal.
Unlike a traditional IRA, Roth IRA contributions are made with after-tax dollars. But any money generated within the Roth is never taxed again.
You can take withdraw contributions you've made to a Roth IRA before retirement age without penalty, provided five years have passed since your first contribution. You're not required to begin taking withdrawals at age 70 1/2 as you are with traditional IRAs, 401(k)s, and other retirements savings plans.
Putting money in a Roth is a great place to invest extra cash if you're just starting out and you think your income will grow, and you'll give your future self an amazing tax break. You can even contribute to both an IRA and a Roth IRA, but your total contributions to both plans can't exceed the $6,000 contribution limit for the year. (Credit: thebalance)