With a tax-deferred investment, your earnings can grow tax-free until you withdraw them. This means that instead of paying taxes on returns as they grow, you pay them only at a later date. Individual Retirement Accounts (IRAs) and deferred annuities are common tax-deferred investments.


With a tax-free investment, earnings aren’t taxed. Municipal bonds are a common tax-free investment (though state and local taxes or the federal alternative minimum tax may apply in some cases).

Investment gain

An investment gain is when a purchase you made increases in value and/or you receive investment income.

Ordinary income

Ordinary income is income you receive from your salary or wages, or from commissions, dividends, or interest income from investments. You can make standard tax deductions from ordinary income.

Earned income

Earned income is income you receive from your salary, wages, tips, commissions, and bonuses.

Qualified employer-sponsored retirement plan

A plan your employer sponsors to help you save for your retirement. Examples are 401(k) plans, 403(b) plans, profit-sharing plans, money purchase plans, and Keoghs/Qualified Retirement Plans (QRPs).

Qualified withdrawal

For a Traditional IRA, you must be at least 59½, be disabled, or be making a first-time home purchase (up to a $10,000 lifetime maximum) to take a qualified distribution. Withdrawals aren’t subject to a penalty tax but are subject to income tax.

For a Roth IRA, in addition to your account being open at least five years, you must be at least 59½, be disabled, or be making a first-time home purchase (up to a $10,000 lifetime maximum). Distributions are then not subject to income tax or a 10% penalty.

Required beginning date

If you have an IRA or are a qualified plan participant, this is the date by which you must begin taking Required Minimum Distributions (RMDs).

Required Minimum Distribution (RMD)

Once you reach age 70½, you are required by law to take money out of your Traditional IRA annually. These mandatory withdrawals are called Required Minimum Distributions (RMDs). Your first RMD must be taken by April 1 of the year after you turn 70½.

Modified Adjusted Gross Income (MAGI)

You use your modified adjusted gross income amount to see how much of your Traditional IRA contribution is tax-deductible.

Five-year holding period rule

If you’re withdrawing money from a Roth IRA that’s been open less than five years, you will pay taxes on earnings and could be subject to a 10% early withdrawal penalty.


An individual retirement account (IRA) is an account that allows you to save for your retirement and take advantage of tax benefits. There are many types of IRAs: Traditional, Roth, Rollover, SIMPLE, and SEP-IRAs.