An IRA is a special account that allows you to save for retirement on a tax-deferred basis. There are five different types of IRAs that you can open:
- Traditional IRA: You make contributions that you can generally deduct on your tax return. The earnings you generate in your account will grow tax-deferred until you withdraw them at retirement. When you retire and start to collect the money (retirement distribution), your entire distribution will be taxed at ordinary income levels. Many retirees are in a lower tax bracket than they were when working, which means their IRA funds may be taxed at a lower rate.
- Roth IRA: You pay taxes on your contributions before you put them into your account. Your money will then grow tax-free, and in retirement you can also withdraw it tax-free (provided that certain conditions are met). If you are currently in a lower tax bracket (you currently have lower income) but plan to be in a higher tax bracket (you will have higher income) when you retire, a Roth IRA is a good option because you can pay tax on the lower amount now, and receive your higher benefits tax-free upon retirement.
- Rollover IRA: This IRA is a Traditional or Roth IRA used to “roll over” funds from a qualified retirement plan (usually a 401(k) or 403(b), or another IRA). The tax advantages operate the same way as with a Traditional or Roth IRA, depending on the previous account.
- Spousal IRA: This IRA is a Traditional or Roth IRA for a spouse who doesn't work. You can open a spousal IRA if you are married (filing jointly) on your tax return and have joint taxable compensation reported for the year.
- Inherited IRA: An Inherited IRA is one that you have inherited from someone else after they pass away. You can inherit an IRA either as a spouse ,or as someone else. If you are a spouse, you can choose to treat the IRA as your own, or treat yourself as a beneficiary. If you are not a spouse, you must be treated as a beneficiary, which means you can not make any contributions to the IRA or rollover any funds. Instead, you must take distributions every year according to the special rules for beneficiaries.