How does an IRA work?
An IRA is one of the most common types of retirement savings options. It is based on a provision of the tax code that allows you to set up an individual arrangement for your retirement. Some investment options within an IRA include, but are not limited to: mutual funds, stocks, bonds, annuities, and certificates of deposit (CDs).
A. You invest money in an IRA, up to the amounts allowable under the tax law. These investments are termed “contributions.” In many instances an income tax deduction is available for the tax year for which the funds are contributed. The contributions, as well as the earnings and gains from these contributions, accumulate tax-free until you withdraw the money from the account. You therefore enjoy the ability to generate additional earnings, unreduced by taxes on these earnings, each year the funds remain within the IRA. The withdrawals of the funds from the IRA are termed “distributions.” Distributions are subject to income taxation, generally in the year in which you receive them. (Remember that in most cases you received an income tax deduction when you contributed the money to the IRA.) As with most things involving the government, the rules for distributions are more complicated than they need to be. Since the original purpose of the IRA is to assist you in providing for your own re
