IRA (Individual Retirement Account).
In plain English
An IRA, or individual retirement account, is a retirement account you set up yourself at a brokerage or bank, apart from an employer's 401(k). It comes in two main types: a traditional IRA, funded with pre-tax money that is taxed when you withdraw, and a Roth IRA, funded with after-tax money that comes out tax-free in retirement. Annual contributions are capped, and Roth contributions phase out at higher incomes. An IRA is a container for investments, not an investment itself; you choose what it holds.
01Why it matters
An IRA is one of the main ways to save for retirement with tax advantages, and choosing traditional versus Roth decides when you pay the tax on that money.
02The math, step by step
You open a Roth IRA and contribute 6,000 dollars of after-tax money, invest it in an index fund, and decades later withdraw it and its growth completely tax-free in retirement.
03What this is NOT
An IRA is NOT a 401(k). A 401(k) is offered through an employer with higher contribution limits and possible matching; an IRA you open yourself, with lower limits but more investment choice.