An IRA is an Individual Retirement Account designed for individuals to save for retirement with tax advantages. Individuals receive either tax-free growth or can save on a tax-deferred basis. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

As long as individuals meet certain rules, a Roth IRA is not taxed when funds are withdrawn. The money is taxed when it goes into the account. This is a great retirement option for individuals who predict that their taxes will be higher in the future than in the present. On the other hand, a Traditional IRA is a better option if an individual predicts they’ll be in a lower tax bracket upon retirement. In a Traditional IRA, contributions are tax-deductible, but earnings are not tax-free as they are with a Roth IRA. Individuals pay a tax on withdrawals.

For Roth IRA’s, withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.