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Listeners may wonder what differentiates an IRA from a standard savings account. The primary distinction is the tax-deferred nature of IRAs. Unlike regular savings accounts where interest and dividends accrue taxable income, funds in an IRA can grow tax-free until withdrawal. This feature encourages individuals to save and invest, making IRAs a beneficial long-term savings vehicle.
Types of IRAs
There are primarily two types of IRAs that individuals should be aware of: Traditional IRAs and Roth IRAs.
Traditional IRA
This account allows individuals to make tax-deductible contributions, meaning that contributions reduce the taxable income for that year. However, withdrawals in retirement are taxed.