The IRA (Individual Retirement Account) can be a confusing subject. An IRA is not an individual investment. It provides tax advantages to protect your investment (Mutual Funds, Stocks, CD, Money Market, etc.) from taxes to help you save for retirement.
There are two main types of IRAs: Traditional and Roth. Both have many specifics in common:
You and/or your spouse can contribute if you have income from a job, contributions are capped at $6K/year for each individual ($7K if you are over age 50), and you will pay a penalty if you make withdrawals before age 59 1/2.
Here are the main differences:
Contributions to traditional IRAs are tax-deductible (not to be confused with a tax credit) in most cases, there are no annual income limits, you must make required minimum withdrawals after age 72, and you must pay taxes on the withdrawals.
Contributions to Roth IRAs are not tax-deductible, there are income limits, no required withdrawals, and you are not taxed on qualified withdrawals.
I favor a Roth IRA for its tax-free growth and distribution benefits. I recommend investing your Roth IRA in good growth stock mutual funds that have at least a 15-year window of results that match or outperform the S&P 500 index. The only situations that I would suggest a traditional IRA would be for someone over age 55 (although I would recommend meeting with a financial advisor to help you crunch the numbers) or if you have a 401K or pension from a previous job. A retirement plan from a previous employer should always be transferred to a traditional IRA via “direct transfer rollover” to avoid a large tax event.
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