Individual retirement account (IRA)

This is a a type of retirement plan to which an individual with earned income can contribute a statutory maximum.

IRAs are categorized as traditional IRAs or Roth IRAs. With a traditional IRA, an individual can contribute and deduct a maximum of $5,000 per tax year in 2012. The deduction is a deduction for AGI and can reduce the taxes owed.

by contrast, with a Roth IRA, an individual can contribute a maximum of $5,000 per tax year in 2012. No deduction is permitted from AGI.