IRA stands for Individual Retirement Account. An employee can save money by putting aside a percentage of his income every month in an IRA. It is like a personal savings account. One can withdraw money from this account at the time of retirement or quitting a job. Like 401(k), IRA is also a tax-deferred account.

There can be different types of IRAs. One can set up an IRA on his own or an employer may provide it. When you withdraw money from an IRA, it is generally taxed. But one has to pay lower taxes at that time as after retirement one is often in a lower income category. On the other hand, money is deposited in an IRA before it is taxed. This implies that one can save a substantial amount of tax through IRA. But there are certain restrictions also.

The contributions made to the IRA are tax deductible only if one is not covered by any other retirement plan. Also, there are certain restrictions related to the amount one can contribute to an IRA if one is below a particular age.

There are certain provisions such as SEP IRA, which helps a self-employed individual or a small business to make contributions into an IRA instead of a pension fund account. Of late, educational IRAs have become very popular. It allows one to help a child to pay for his or her education expenses.

In case of a simple IRA, both employers and employees make contributions. It is less expensive to operate. Many companies prefer this type of IRA. Though most retirement plans can also be rolled into IRAs, there are certain things such as real estate which cannot be held by an IRA unless it is held in the form of a real estate investment trust.