Individual Retirement Arrangement

Individual retirement arrangement (IRA). An individual retirement arrangement (IRA), which may be set up as either an account or an annuity, allows people with earned income to contribute to a tax-deferred traditional IRA or a tax-free Roth IRA.

Your contribution can be as much as the annual cap, though it can't be more than you earn. The cap is $4,000 for 2007 and $5,000 for 2008. If you are 50 or older, you can make an additional catch-up contribution of $1,000 a year.

You can contribute to a traditional IRA regardless of your income, and you may qualify to deduct your contribution if your modified adjusted gross income is less than the ceiling for your tax filing status. You may also qualify if you're not eligible to participate in an employer sponsored plan where you work.

You qualify for a Roth if your modified adjusted gross income is less than the ceiling for your filing status.

If you open a traditional IRA, you usually can't withdraw without penalty before you turn 59 1/2 and you must begin minimum required distributions (MRDs) by April 1 of the year following the year you turn 70 1/2.

Income taxes figured at your regular rate are due on your earnings and on any contributions you deducted on your tax return in the year for which you made them.

With a Roth IRA your withdrawals are free of federal income tax provided you're at least 59 1/2 and your account has been open at least five years. There are no required withdrawals.

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Individual Retirement Arrangement (IRA)

An individual retirement arrangement is a trust set up to receive retirement contributions of individuals. The arrangement may be in the form of an individual retirement account or individual retirement annuity. The amount that may be contributed is limited. Amounts earned in the IRA are not taxed until they are withdrawn.