Final answer:
The IRA stands for Individual Retirement Account, a retirement savings option that allows for tax-deferred growth, similar to a 401(k) plan. IRAs have annual contribution limits and come in two main types: Traditional and Roth. Defined contribution plans like 401(k)s have replaced traditional pensions, offering tax deferment and portability across jobs.
Step-by-step explanation:
The acronym IRA stands for Individual Retirement Account, which is a type of retirement savings account with tax characteristics similar to employer-sponsored 401(k) plans. An IRA allows individuals to direct pretax income, within certain annual limits, into investments that can grow tax-deferred. This means that no capital gains or dividend income is taxed until withdrawal. The Roth IRA variant allows for contributions to be made after-tax, hence withdrawals during retirement are tax-free. Both IRAs and 401(k)s encourage saving by deferring taxes until funds are withdrawn, typically during retirement.
While traditional pensions, or defined benefit retirement plans, have become less common, they've been largely replaced by defined contribution plans, like 401(k)s and 403(b)s. These allow both employers and employees to contribute a fixed amount to retirement accounts on a regular basis, with the contributions being tax-deferred. The portability of a 401(k) ensures that an employee can take their retirement savings with them when changing jobs.