An individual retirement account, or IRA, is a retirement savings vehicle that you can fund and manage on your own. It offers tax benefits -- either as you invest your money or as you withdraw it -- as well as provides you the chance at a comfortable retirement. Compared to other retirement plans, you have a bit more flexibility in how you use the money in your account.
With the funds in your IRA, you can invest in stocks, bonds, mutual funds, exchange-traded funds and CDs. You control where you place your money based on the level of risk that you want to take. For example, if you have several years until retirement, you may want to invest in something high-risk/high-return, like stocks, but if retirement is coming soon, you can invest in "safer" investments, like bonds or CDs. The exact process of changing investments varies by institution, but note that there are often charges incurred each time you buy and sell investments within the account.
Save for Retirement
The main purpose of an IRA is to save for your retirement years. When you turn 59 1/2 years old, you can start to make penalty-free withdrawals from your traditional IRA. You'll have to pay taxes on withdrawals from a traditional IRA, but Roth IRA withdrawals are tax-free. Use this money to supplement the money you receive from Social Security, a pension or other types of retirement savings.
Reduce Your Taxable Income
Contributions to traditional IRAs use pre-tax dollars, which means that you can earn a tax deduction. As long as you don't have an employer-sponsored retirement plan at work, you can deduct the full amount that you contribute, reducing your taxable income by as much as $5,000 if you are under 50 or $6,000 if you are 50 or older.
Use for Allowable Expenses
Unseen payments can creep up on you. If you have money in an IRA, you may be able to use that money to cover these expenses. You are allowed to take out all of the contributions you've made to a Roth IRA for any reason at all, though you may have to pay a penalty if you withdraw the earnings on your contributions. You can take penalty free withdrawals from either type of IRA for certain expenses, like buying a home, paying health insurance when you're unemployed, higher education expenses or paying back taxes.
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