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An Individual Retirement
Account, or IRA, is a tax-deferral advice allowed by tax law. The account,
typically opened by the taxpayer, can be funded up to certain limits with
pre-tax dollars (except for the Roth IRA, which works differently). This means
the contributions to these accounts are tax-deductible. Moreover, when the
account earns income, such as from dividends or capital gains when its assets
are sold, there is no income tax on this income. However, when the money is
eventually withdrawn, it is subject to income tax.
There are many types of IRAs,
with the “Traditional” IRA being the most basic. Other types of IRAs include
SEP and SIMPLE IRAs, which are devices primarily used by small businesses and
sole business owners. There are limits on how much can be contributed to each
type and there are also limits on how much income the taxpayer can make and the
still take advantage of these devices.
IRA assets withdrawn before
age 59 ½ are subject to a 10% penalty, with exceptions for certain withdrawal
purposes. Starting at age 70 ½,
“required minimum distributions” must be taken, and these increase as the
account holder gets older.