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Useful Dictionary of Financial Terms Explains the ABCs of IRAs

"Individual Retirement Account," most responded.

"Good. Now who can explain exactly what an IRA is?"

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"It's for retirement investing," someone said.

"True, but explain to me how it works."

Silence.

Upon pressing them, I found that most only vaguely knew that an IRA is just the account you set up and that you have to select investments to go into it.

Here's what else "Dictionary of Financial Terms" says about an IRA (for those who don't know): "These tax-deferred retirement accounts are designed to encourage working people to invest for the long term. If you earn income from work, or are married to someone who does, you can put up to $3,000 per year in an IRA and postpone paying tax on any earnings. If you're 50 or over, you can invest an additional $500 each year."

"In this day and age, we are so dependent on all this fairly complicated financial stuff," Virginia Morris said in an interview. "But we aren't always sure of some things, such as the difference between tax-exempt and tax-deferred."

Do you know?

If you read "Dictionary of Financial Terms," you would find out that some investments are tax-exempt, which means you don't have to pay income tax on their earnings. Tax-deferred means you are allowed to postpone paying income tax until you begin withdrawing from the account in which the investment is held.


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