What is an IRA? | IRS Definition of an IRA

An Independent Retirement Arrangement (IRA) is a way that individuals can set aside dollars, usually pre-tax, towards their eventual retirement. This is different from Employer Plan 401K, Money Purchase Plan.  By setting aside money pre-tax, they can allow it to grow far more than they would have otherwise been able to. There are multiple types of IRA, including Roth IRAs (which do set aside post-tax dollars), and self-directed IRAs, all of which has some of their own rules about when money can be taken out and how it can be invested.

An IRA has its own EIN for reporting purposes. This makes sense: the IRA is not directly under the individual’s control (unless it is a self-directed IRA, which is more complicated). An IRA can invest as an individual directs, but an individual is not free to take this money out at any time, or use it any way that they wish. Money from an IRA can be taken out at retirement age tax-free, but if it’s taken out earlier than that, it is taxed and often assessed a penalty as well.


Written by Maurice Mallory