What is the main characteristic of an Individual Retirement Account (IRA)?

The main characteristic of an Individual Retirement Account (IRA) is that contributions are tax-deferred based on earned income. This means that individuals can make contributions to their IRA and defer income tax on those contributions until withdrawals are made during retirement. The ability to grow investments within the account without being taxed annually allows for potentially greater growth over time, as the money can compound uninhibited by taxes.

This feature encourages saving for retirement by allowing individuals to contribute a portion of their earnings while postponing tax liability. When funds are eventually withdrawn, typically during retirement, they are subject to income tax based on the individual's tax bracket at that time.

In contrast, the notion that only employers can contribute (the first option) is incorrect because IRAs are established by individuals, allowing them to contribute their own eligible earnings. The statement regarding contributions being made after taxes are paid (the third option) applies to Roth IRAs, not traditional IRAs, where contributions can indeed be made with pre-tax dollars. Lastly, the claim that there are no contribution limits is misleading; IRAs have annual contribution limits set by the IRS, making the answer regarding tax-deferred contributions based on earned income the most accurate representation of an IRA's main characteristic.