A more thorough explanation:

An individual retirement account (IRA) is a personal retirement account that allows employees to receive tax benefits similar to those of an employer-sponsored 401k plan. Unlike 401ks, IRAs can be created at many banks and investment companies with a variety of investment options.

Employees can contribute up to a certain amount each year, set by the Internal Revenue Service (IRS), without incurring taxes until they withdraw the money from the account. For example, in 2022, the limit is $6,000 for employees, and individuals aged 50 and over can contribute an extra $1,000 each year. However, if an employee has an employer-sponsored retirement plan, such as a 401k, they may not be able to deduct contributions to their IRA.

Withdrawals from an IRA can begin when an individual reaches 59 ½ years of age or meets certain exceptions, such as disability. If someone withdraws money from their IRA before meeting these requirements, they must pay a 10% penalty tax on top of other taxes on withdrawals. Once an individual reaches the age of 72, they must begin making a specific amount of withdrawals from their IRA unless they continue to work.

Roth IRAs operate differently than traditional IRAs, with contributions being taxed in the year contributed to the account. However, when an individual withdraws money from the IRA upon retirement, the withdrawals will not be taxed. Roth IRAs do not require individuals to begin withdrawing money after reaching age 72.

For example, if an individual contributes $5,000 to their IRA in 2022 and earns $50,000 per year, they may be able to deduct the full $5,000 from their taxable income. However, if the same individual earns $80,000 per year and contributes $5,000 to their IRA, they may only be able to deduct a portion of their contribution based on their income level.

Another example is if an individual withdraws money from their IRA at age 60 to pay for medical expenses, they may be exempt from the 10% penalty tax.