IRA stands for Individual Retirement Arrangement. If you want to do more to invest for retirement than your employer-provided TSP, or you just want to do something different, you can put together your own IRA.
Your IRA isn’t an investment itself — it’s a tax-advantaged place to deposit money that will be used to purchase investments. The money you put in an IRA can purchase mutual funds, individual securities, certificates of deposit (CDs), annuities, and few other things.
IRAs come in two main varieties — traditional and Roth. You can have one or the other, or both depending on what tax handling you think will work best for you.
Traditional IRA contributions are made with pre-tax money most of the time. This means contributing can decrease your taxes today — but you’ll have to pay those taxes when you take money out in retirement.
Roth IRA contributions are made with after-tax money. You get no tax savings today, but you do get to take money out tax-free in retirement (as long as a few criteria are met). Be sure to understand the income restrictions and limits on contributions, though.
Before you set up an IRA, make sure you are in a good position to leave contributions alone until retirement. Why? Because IRAs are set up to reward long-term investing. Even though Roth IRA contributions (and only the contributions) can be removed at any time without taxes or penalties, other IRA withdrawals before retirement age can mean paying taxes with hefty penalties on top. Not cool.
IRA rules can be confusing. It may be wise to engage a qualified income tax professional to help you make sure you’re setting them up correctly. To puzzle through the details, IRS Publications 590-A and 590-B contain more information that can help.