An IRA works by allowing you to invest your money in stocks, bonds, and other assets. You can then withdraw this money later in life, when you retire or need it for any other expenses that arise. Anyone with earned income can open and contribute to an IRA, including those who have a 401 (k) account through an employer. The only limitation is on the total contributions to your retirement accounts in a single year.
An IRA, or individual retirement account, is a retirement account that allows you to delay paying taxes until the money is withdrawn. It's similar to a 401 (k), but instead of the account being managed by your employer, it's an account that you choose and manage yourself. IRAs work differently depending on the type of IRA, the person's age, and the amount of earned income. Depending on the type of IRA you use, an IRA can lower your tax bill when you make contributions or when you withdraw money when you retire.
Different types of IRAs work best for certain people; two of the most well-known are traditional IRAs and Roth IRAs. Traditional IRAs increase with deferred federal income taxes, while Roth IRAs grow tax-free, so the money you invest in your accounts today can generate more money when you need it when you retire. There are annual income limits for deducting contributions to traditional IRAs and contributing to Roth IRAs, so there is a limit to the amount of taxes you can avoid investing in an IRA. It's possible to have a Roth IRA and a traditional IRA, or several IRAs at different institutions.