Simple English definitions for legal terms
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An Individual Retirement Account (IRA) is a type of savings or brokerage account that allows a person to save money for their retirement. You can contribute a certain amount of money each year, and the money you put in and any interest it earns is not taxed until you withdraw it after you turn 59 1/2 years old. There are different types of IRAs, including the Education IRA, which allows you to withdraw money tax-free for education expenses, and the Roth IRA, which lets you contribute money that is not tax-deductible but is also not taxed when you withdraw it.
An individual retirement account (IRA) is a type of savings or brokerage account that allows a person to contribute a certain amount of earned income each year. The contributions, along with any interest earned, are not taxed until the money is withdrawn after the account holder reaches 59 1/2 years old. If money is withdrawn before then, a 10% penalty may apply.
There are different types of IRAs, including:
Let's say John has a traditional IRA and contributes $5,000 per year. He earns interest on his contributions, but does not pay taxes on that interest until he withdraws the money. When John turns 65 and starts withdrawing money from his IRA, he will pay taxes on the amount he withdraws.
Another example is Sarah, who has a Roth IRA. She contributes $3,000 per year and earns interest on her contributions. When Sarah turns 60 and starts withdrawing money from her Roth IRA, she will not have to pay taxes on the amount she withdraws, as long as she follows the rules for Roth IRA withdrawals.
These examples illustrate how IRAs work and the different tax implications for different types of IRAs.
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