An Individual Retirement Account (IRA) is an investment account used by individuals to earn and save funds for retirement savings. There are two major types of IRAs available, Traditional and Roth IRAs.
A Traditional IRA allows individuals to direct pre-tax income towards investments that can grow tax-deferred, so you won’t be paying taxes on your earnings or deductible contributions until you begin taking withdrawals. Contributions to a Traditional IRA may be tax-deductible on your Federal Income Tax return for the year in which contributions were made.
A Roth IRA is a retirement account where earnings are tax-deferred and you are able withdraw earnings tax free for qualified distributions. Contributions to a Roth IRA are not tax-deductible on your tax return. Since taxes have already been paid on contributions, the money you have contributed to your account can be withdrawn without tax penalties, provided that they are qualified distributions.
You can make annual contributions to an IRA of up to $5,000 or 100% of your earned income, whichever is less. If you are age 50 or older, you may make additional "catch-up" contributions to your IRA.
You can make contributions to your IRA from January 1 of the tax year until the tax filing deadline for the tax year, which is generally April 15.
To qualify for the federal tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five years, and the distribution must take place after age 59½ or due to death, disability, or a qualified special purpose distribution, which is a qualified first-time home purchase (up to a $10,000 lifetime maximum). Depending upon state law, Roth IRA distributions may be subject to state taxes.