Individual Retirement Account (IRA) Legal Meaning and Definition

Here is a simplified definition of the legal term Individual Retirement Account (IRA).

Individual Retirement Account (IRA)


An IRA is a personal savings scheme which encourages individual contributors to set aside funds for retirement due to its tax benefits. These can include tax-deductibility of contributions, depending on certain factors such as participation in employer-supported programs like 401(k) plans. In a traditional IRA, the saved earnings remain untaxed until they are withdrawn. In a Roth IRA, withdrawals can be tax-free if specific criteria are fulfilled. If funds are withdrawn before the contributor turns 59 1/2, tax penalties may apply. The total amount that can be added to an IRA yearly has a maximum limit ($3000 as of tax year 2004).