What is an IRA?

An IRA (Individual Retirement Arrangement) is a personal savings plan that offers tax advantages for setting aside money for retirement. Some contributions to IRAs may be deducted from income. There are several types of IRA; this section discusses "traditional" IRAs.

A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. Some of the features of a traditional IRA are:

• Taxpayers may be able to deduct some or all of their contributions to the IRA (depending on circumstances)
• Generally, amounts in an IRA, including earnings and gains, are not taxed until distributed
• Contributions may be eligible for the retirement savings contributions credit

For more information on all types of IRAs, refer to the Individual Retirement Arrangements (IRAs) chapter in Publication 17 and Publication 590, Individual Retirement Arrangements. For information on the types of IRAs and IRAs as a source of income, see the Retirement Income lesson.

Although contributions to a Roth IRA cannot be deducted, the taxpayer may be eligible for the retirement savings contribution credit, discussed in the lesson on Miscellaneous Credits.

During the tax year, Fred contributed $2,200 to a traditional IRA and $1,000 to a Roth IRA. The most Fred will be able to deduct is the $2,200 contribution to his traditional IRA. He may be eligible for the Retirement Savings Contribution Credit for the Roth IRA contribution.