individual_retirement_accounts_iras [CapiPedia]

This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong.
======Individual Retirement Accounts (IRAs)======
An Individual Retirement Account (IRA) is a special investment account available in the United States that offers powerful tax advantages to help you save for retirement. Think of it less as an investment itself and more as a special //wrapper// or //shopping basket// that you put your investments into. Inside your IRA basket, you can hold a wide variety of assets, such as [[stocks]], [[bonds]], [[mutual funds]], and [[ETFs]]. The magic of an IRA lies in its tax treatment. Depending on the type of IRA you choose, you can either get a tax break now on your contributions or enjoy tax-free withdrawals when you retire. This tax-sheltered growth is a massive tailwind for your long-term savings, allowing your money to work harder for you over decades without being chipped away by annual taxes. For any serious long-term investor, understanding and utilizing an IRA is a fundamental step toward building wealth.
===== The Two Flavors of IRA: Traditional vs. Roth =====
The two most popular types of IRAs offer a simple but profound choice: pay taxes now or pay taxes later.
==== Traditional IRA ====
This is the classic choice. You typically contribute with pre-tax dollars, meaning you may be able to deduct your contributions from your taxable income for the year, giving you an immediate tax break. Your investments then grow //tax-deferred//, so you don't pay any taxes on capital gains or dividends year after year as your money compounds. The catch? When you start taking money out in retirement (after age 59½), those withdrawals are taxed as ordinary income. A Traditional IRA is often a good fit for people who believe they will be in a lower tax bracket during retirement than they are today.
==== Roth IRA ====
This is the modern alternative. You contribute with post-tax dollars, so there's no upfront tax deduction. But here's the beautiful part: your investments grow completely tax-free, and all qualified withdrawals you make in retirement are also **100% tax-free**. No taxes on your growth, ever. This can be an incredibly powerful tool, especially for younger investors with a long time horizon or for anyone who expects to be in a higher tax bracket in the future. The certainty of tax-free income in retirement is a major advantage that is hard to overstate.
===== Beyond the Basics: Other Types of IRAs =====
While Traditional and Roth IRAs are the most common for individual employees, a couple of others are worth knowing, especially for the self-employed or small business owners.
  * **[[SEP IRA]] (Simplified Employee Pension):** A straightforward way for self-employed individuals or small business owners to make significant retirement contributions for themselves and their employees. Contribution limits are much higher than for Traditional or Roth IRAs.
  * **[[SIMPLE IRA]] (Savings Incentive Match Plan for Employees):** Designed for small businesses (typically under 100 employees) as an easy-to-administer retirement plan that often includes employer contributions.
===== IRAs from a Value Investing Perspective =====
For a [[value investor]], an IRA isn't just a good idea; it's a superpower. The core philosophy of value investing is patience—buying wonderful businesses at fair prices and holding them for the long term. An IRA is the perfect vehicle for this strategy. Why? Because the tax-advantaged environment allows the miracle of [[compounding]] to run wild. Inside an IRA, your dividends and capital gains are shielded from the annual tax drag, meaning more of your money stays invested and working for you. This allows you to focus purely on business fundamentals and long-term value creation, without having to worry about the tax consequences of rebalancing your portfolio or selling a company that has reached its [[intrinsic value]]. The long-term nature of an IRA aligns perfectly with the patient temperament required to be a successful value investor.
===== Key Rules and Considerations =====
IRAs come with rules set by the [[IRS]] to ensure they're used for their intended purpose—retirement. Here are the big ones:
  - **Contribution Limits:** There's a cap on how much you can contribute each year. This amount is set by the government and can change over time. (There are also "catch-up" provisions for those age 50 and over).
  - **Income Limits:** Your ability to contribute to a Roth IRA or deduct contributions to a Traditional IRA can be phased out or eliminated if your income exceeds certain levels.
  - **Early Withdrawal Penalties:** Taking money out before age 59½ typically results in a 10% penalty on top of any regular income tax owed. There are exceptions for things like a first-time home purchase or certain medical expenses, but the penalties are designed to discourage you from raiding your nest egg.
  - **Required Minimum Distributions (RMDs):** The government wants its tax money eventually. For Traditional IRAs, you must start taking [[RMDs]] (and paying taxes on them) after you reach a certain age (currently 73). A major benefit of Roth IRAs is that the original owner is not subject to RMDs.