Individual retirement account (IRA)

An IRA is a retirement account established by an individual rather than by an employer. Anyone with earned income can open one at a bank, brokerage, or mutual fund company and invest the balance in stocks, bonds, funds, and most other securities. Annual contributions are capped by law, with an additional catch-up amount allowed once the owner reaches the qualifying age; both figures are adjusted periodically, so learn the mechanism rather than a specific dollar amount.

The two main types differ in when the tax break arrives. A traditional IRA may allow a deduction on the contribution, grows tax-deferred, and is taxed as ordinary income when withdrawn. A Roth IRA takes after-tax contributions, grows tax-free, and produces tax-free qualified distributions. Whether a traditional contribution is deductible depends on income and on whether the saver is covered by a workplace plan; Roth eligibility phases out above certain income levels.

Both types discourage early access. Withdrawals taken before age 59½ generally trigger ordinary income tax on the taxable portion plus a 10% penalty, with statutory exceptions such as death, disability, qualified first-time home purchase, and certain education or medical expenses. Traditional IRAs are also subject to required minimum distributions beginning at the age set by current law, while Roth IRAs have no lifetime RMD for the original owner.

Not everything can go in an IRA. Life insurance and collectibles are prohibited, and strategies that require substantial risk of loss — such as uncovered option writing or margin trading — are not permitted, since the account is meant for long-term accumulation.

IRAs appear on the SIE, Series 6, and Series 7 exams in the retirement and education plans section. Expect questions on the traditional-versus-Roth tax treatment, the early-withdrawal penalty and its exceptions, prohibited investments, and which recommendations are suitable inside a retirement account.