What is an IRA?

IRA stands for Individual Retirement Account. These retirement savings vehicles were created to give people another way to save for retirement. In a nutshell, an IRA allows you to save for retirement and get a tax deduction for the money you contribute. As a result, your taxable income is reduced so you get taxed on a lower amount.

For example, if I earned $15,000 last year and contributed $5,000 to an IRA, the IRS would only tax me on $10,000 (my taxable income). While this is all fine and well, there are some drawbacks such as penalties for early withdrawal (before 59 and 1/2) and you have to withdrawal money when you are 70 1/2. Despite the drawbacks, an IRA is a great savings vehicle for building a fund for retirement. To help explain IRAs in greater detail, the Khan Academy has put together a great video to help guide you through the mechanics of an IRA. Enjoy!