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Definition / Meaning of

Individual Retirement Arrangement (IRA)

Categories: Finance,

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 is a portion of your earnings, up to an annual cap, though it can't be more than you earn. The cap is $4,000 for 2006 and 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.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 you made them.If you qualify for a roth ira because your modified adjusted gross income is less than the ceiling for your filing status, you make after-tax contributions but 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 from roth iras.