An IRA is a retirement plan account that provides some tax advantages for retirement savings. There are a number of different types of IRAs, which may be either employer-provided or self-provided plans.
  • Traditional IRA: Contributions are often tax-deductible, and all transactions and earnings within the IRA have no tax impact. Withdrawals at retirement are taxed as income (except for the portion of the distribution attributable to nondeductible contributions). Owners must begin taking distributions by April 1 of the year after reaching age 70½.
  • Roth IRA: Contributions are made with after-tax funds. All transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Distributions are not required beginning at age 70½, so a Roth IRA may allow you to pass on more to your heirs.

The maximum annual IRA contribution is $5,000 if you're younger than 50. Individuals age 50 and older can contribute up to $6,000.

You can take money out of a traditional IRA at any time, but if you take it out before age 59½, you generally will have to pay a 10% early distribution penalty in addition to income tax.

Exceptions to the penalty include up to $10,000 used to purchase a first home, amounts for qualified higher education expenses, amounts for medical expenses that exceed 7.5% of your adjusted gross income (even if you don't itemize), amounts up to the amount of your medical insurance premiums if you received unemployment compensation for at least 12 consecutive weeks, and amounts you withdrew because of permanent and total disability. See IRS Publication 590 for more detail about these exceptions.


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