What is an IRA?
An Individual Retirement Account (IRA) is a self-directed retirement savings account with tax advantages. Two main types exist: Traditional IRAs (tax-deductible contributions) and Roth IRAs (tax-free growth).
An IRA is an individual retirement account with tax benefits. Traditional IRAs offer tax-deductible contributions; Roth IRAs offer tax-free withdrawals. Both have annual contribution limits.
- •Contributions may be tax-deductible
- •Withdrawals taxed as income
- •RMDs required at age 73
- •Better if you're in a high tax bracket now
- •2024 limit: $7,000 ($8,000 age 50+)
- •Contributions not tax-deductible
- •Withdrawals tax-free (qualified)
- •No RMDs in your lifetime
- •Better if you expect higher tax rate in retirement
- •2024 limit: $7,000 ($8,000 age 50+), income limits apply
Step-by-step worked examples
You earn $70,000 and contribute $7,000 to a Traditional IRA. Assuming 24% tax bracket, how much do you save in taxes?
Tax deduction = $7,000 × 24% = $1,680 in tax savings
At 60, your Roth IRA has $200,000 (grown from $50,000 contributions). You withdraw $30,000. Any taxes?
Roth contributions can be withdrawn anytime tax-free. If it's only contribution withdrawal: $0 tax. If earnings withdrawal before 59½: earnings taxed + 10% penalty.
You have a Traditional IRA with $500,000 at age 75. Your IRS factor is 24.5. What's your RMD?
RMD = $500,000 / 24.5 = $20,408.16
Flashcards
Quick quiz
Q1.Traditional IRA contributions are...
Q2.Roth IRA withdrawals at 60 (qualified)...
Q3.Which IRA has income limits?
Q4.RMDs on a Roth IRA during your lifetime?
The full card deck, worked steps and AI-tutor support for “What is an IRA?” are in Notek — study by hand before your exam.
Common mistakes
You can contribute to both a 401(k) and an IRA without limits. — Correct: You can contribute to both, but IRA deductibility phases out if you have a 401(k) at high income.
Roth IRAs are only for young people. — Correct: Anyone can benefit from Roth, especially if expecting higher retirement tax brackets.
IRAs are a type of investment. — Correct: IRAs are account types. You choose investments (stocks, bonds, CDs) inside them.
You must close your IRA at retirement. — Correct: IRAs can stay open for life (and beyond, as inherited IRAs for beneficiaries).
FAQ
What is an IRA?
An Individual Retirement Account — a tax-advantaged self-directed retirement savings account.
Should you choose Traditional or Roth IRA?
Traditional if you want immediate tax deduction. Roth if expecting higher tax rates in retirement.
Can you contribute to both 401(k) and IRA?
Yes, but IRA deduction limits apply based on income if you have a workplace 401(k).
Can you inherit an IRA?
Yes. Beneficiaries must take distributions, but Roth beneficiaries inherit tax-free growth.