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Curious Cat Investing Dictionary: IRA

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IRA (Individual Retirement Account) - A special account that allows retirement savings to grow tax deferred, and contributions are tax deductible. See related links, below, for much more details on this complex topic.
Roth IRA - A special retirement account that allows retirement savings that grow and are not taxed when withdrawals are made, as long as the withdrawals are made in accordance with the requirements for a Roth IRA.

After tax dollars are invested in the Roth IRA. Over the long term Roth IRA's can provide huge benefits to the investor, even over a regular IRA. Again see related links below for much more detail on this complex topic.

Return will vary the figures used here are just to provide an example. If you add $3,000 a year to your IRA (and you are in the 20% tax bracket) you would add $3,000 to a regular IRA account or $2,400 to a Roth IRA (and $600 to the IRS). If you received an annual rate of return of 6% for 30 year you would have $237,175 in your IRA. With the same 6% and 30 years you would have $189,740 in your Roth IRA.

But now the withdrawals from the Roth IRA are tax free and withdrawals from the regular IRA are taxed. If your investment returned stayed 6% and your tax rate stayed 20% you would receive the same amount from each account after taxes $11,384. If you continued to get a 6% rate of return you could take that amount forever.

Related Terms:

401(k) and 403b