Tax glossary

Individual Retirement Account (IRA)

Individual Retirement Account — what it means, how it works, and a real example, explained without the jargon.

What is Individual Retirement Account (IRA)?

An IRA is a personal retirement account you open yourself, independent of any employer.

How it works

A traditional IRA may give you a deduction now, with tax due at withdrawal. A Roth IRA is funded with after-tax dollars but grows and pays out tax-free. Contribution limits are lower than a 401(k)'s, and deductibility can phase out if you're also covered by a workplace plan.

A quick example

You put $7,000 into a traditional IRA and, if eligible, deduct it — trimming your taxable income by $7,000 this year.

What people get wrong

You can contribute to last year's IRA right up to the April tax deadline. That gives you a rare chance to lower your tax bill after the year has already ended.

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Frequently asked questions

What does Individual Retirement Account mean?

An IRA is a personal retirement account you open yourself, independent of any employer.

How does Individual Retirement Account work?

A traditional IRA may give you a deduction now, with tax due at withdrawal. A Roth IRA is funded with after-tax dollars but grows and pays out tax-free. Contribution limits are lower than a 401(k)'s, and deductibility can phase out if you're also covered by a workplace plan.

What's the most common mistake with individual retirement account?

You can contribute to last year's IRA right up to the April tax deadline. That gives you a rare chance to lower your tax bill after the year has already ended.