Individual retirement accounts (iras) were established by the u.s. government to encourage saving. an individual who deposits part of current earnings in an ira does not have to pay income taxes on th

Individual retirement accounts (iras) were established by the u.s. government to encourage saving. an individual who deposits part of current earnings in an ira does not have to pay income taxes on the earnings deposited, nor are any income taxes charged on the interest earned by the funds in the ira. however, when the funds are withdrawn from the ira, the full amount withdrawn is treated as income and is taxed at the individual's current income tax rate. in contrast, an individual depositing in a non-ira account has to pay income taxes on the funds deposited and on interest earned in each year but does not have to pay taxes on withdrawals from the account. another feature of iras that is different from a standard savings account is that funds deposited in an ira cannot be withdrawn prior to retirement, except upon payment of a substantial penalty.