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An IRA, which stands for Individual Retirement Arrangement, is a type of savings account that helps you save money for your retirement. It's like a special container where you can put your money and invest tax deferred over the long run.
Here's how it works:
When you open an IRA, you can contribute money to it on a regular basis, like every month or every year. You can choose how much money you want to put in, but there are limits on how much you can contribute each year. The money you put into an IRA is typically invested in things like stocks, bonds, or mutual funds, which have the potential to earn you more money over the long term.
One of the advantages of an IRA is that the money you contribute is usually tax-deductible, which means it can help lower your taxes for the year. This can be a nice benefit because it means you get to keep more of your hard-earned money.
Another advantage of an IRA is that the money you invest grows tax-deferred. This means you won't have to pay taxes on any earnings or investment gains until you start taking money out of the account in retirement. This allows your money to grow faster over time.
There is a mandatory withdrawal also know as RMD (Required Minimum Withdrawal) which requires a minimum be withdrawn out of the IRA account at a specific age. Currently age 73 – there is a formula for the minimum to be withdrawn each year and there after.