What advantage does an IRA provide for retirement savings?

An IRA, or Individual Retirement Account, provides significant tax advantages that make it an attractive option for retirement savings. Contributions to a traditional IRA can be tax-deductible, meaning that individuals can lower their taxable income in the year they make contributions. In addition, the investments within the IRA can grow tax-deferred, which means that any capital gains, dividends, or interest earned on the investments are not taxed until the money is withdrawn, typically in retirement. This can lead to a larger nest egg as the funds have the opportunity to compound over time without the annual tax burden.

This framework encourages individuals to save more for retirement since they can defer taxes on the growth of their investments. Moreover, upon withdrawal during retirement, individuals may be in a lower tax bracket compared to their working years, potentially resulting in lower overall tax liability.

The other options present characteristics that do not align with the primary purpose or benefits of an IRA. There's a clear distinction in understanding that IRAs are designed to incentivize long-term savings for retirement rather than for immediate liquidity or being limited to certain types of individuals.