IRA (individual retirement account)

An individual retirement account is a US account for retirement saving that you open yourself with a bank, broker or other provider, rather than through an employer. Anyone with earned income can generally contribute, up to an annual limit set by the IRS. In a traditional IRA, contributions may be tax-deductible, depending on your income and whether you or your spouse are covered by a workplace plan, and investments grow tax-deferred; withdrawals are then taxed as ordinary income. A Roth IRA is the main alternative, taxing money on the way in rather than on the way out. IRAs usually offer a much wider range of investments than a 401(k).

IRAs matter for two reasons: they give people without a workplace plan a way to save with tax advantages, and they are the usual destination for rollovers when someone leaves a job and moves a 401(k) balance. As with a 401(k), withdrawals before age 59½ generally face a 10% additional tax plus income tax, with exceptions such as certain first-home purchases or education costs, and traditional IRAs require minimum withdrawals later in life. A common confusion is to think an IRA is an investment in itself; it is an account, and returns depend on what it holds. The UK’s nearest equivalent is a personal pension such as a SIPP.