Contributions are made with after-tax funds and are not tax-deductible, but earnings and withdrawals are tax-exempt (SEP IRA). There are several types of IRAs, including traditional IRA (deductible IRA and deductible spousal IRA), non-deductible IRA, and Roth IRA. An IRA can be established with an insurance company, bank, or investment company. Traditional IRA deductible contributions may be more advantageous if you expect to be in a lower tax bracket when you retire.
In the case of traditional IRAs, your contributions can be tax-deducted on your federal income tax return, which can reduce your taxable income for the year. Keep in mind that, just like in a traditional IRA, the IRS imposes a 10% penalty on early withdrawals. However, 401 (k) plans have an exception to the penalty if you leave your employer the year you turn 55 or older, which doesn't exist for IRAs. Use this tool to determine if a Roth IRA or a traditional IRA may be right for you.
While there are benefits to using this type of account to save for retirement (especially the potential for higher returns), don't pass up the opportunity until you understand the risks of self-managed IRAs. Depending on the type of IRA you use, an IRA can lower your tax bill when you make contributions or when you withdraw money when you retire.