An IRA stands for Individual Retirement Arrangement, and it's basically a type of retirement account that you can open up to help you save money for your future. The way it works, you put money into an IRA, and you get a tax deduction today for the money that you put in. And that money grows, and over time you can take that out and use it to supplement your income in retirement. The only time you're going to pay tax on that money is when you actually retire and take the money out. So it's a great way for the average person to save for their future.
Now, it's not without its drawbacks. I mean, the government is giving you some tax breaks to help you save for retirement, but they don't want to do that if you're going to use the money before you get to retirement age. And so there could be some tax implications and some penalties if you try and take the money out before then.
So how do you open up an IRA? I mean, really there are three main steps. Step number one, you need to open up the IRA. And you do that by filling out an account application at any of the different financial companies that are out there. That opens the account. Step number two, you have to fund the IRA, which means you're taking your money and actually depositing it into the IRA account. Step number three- and don't forget this one, because a lot of people do- you have to pick investments for that money. Once the money gets into the IRA, you need to choose which investments you're going to use to help that money grow for the future.
So it's really important, particularly if you're somebody that doesn't have a retirement account through your employer. Creating your own retirement account by using an IRA is a really good strategy you should consider.