Individual Retirement Account

A trust or custodial account that is set up in the United States to accumulate funds on a tax-deferred basis to fund retirement. Individuals can contribute up to $3,000 during one year. The Economic Growth and Tax Relief Reconciliation Act of 2001 increases the limits to $5,000 per person by 2008. For people over age 50, additional catch-up contributions are allowed. These rise to $1,000 in 2006.

An IRA account can be set up with a bank, savings and loan, brokerage firm, mutual fund, or other financial institution. IRA funds can’t be used to buy life insurance. The assets in the IRA account cannot be combined with other property, unless it is in a common trust fund or common investment fund.

To be able to deduct the contributions to an IRA from income taxes, a married couple can’t earn more than $53,000, or $63,000 for a qualified widower. A single person is limited to $33,000 in income or $43,000 for a single individual or head of household. That limit does not apply if the individual and spouse are not covered by a retirement plan at work.

Withdrawals from IRA accounts are prohibited before age 59⁄, however in emergencies withdrawals can be made but are subject to a 10 percent penalty tax on top of the regularly owed tax, as determined by income. After age 59,⁄, withdrawals can be made and are taxed at the retiree’s income tax rate.