IAM or Identity and Access Management enables AWS customers to manage user access and permissions. It is important to configure IAM properly by deleting root access keys, enabling multi-factor authentication (MFA) on the root account using an MFA device or Google Authenticator app, and creating individual IAM users to apply necessary permissions and enforce a password policy for security. MFA provides an additional layer of security by requiring a randomly generated one-time code in addition to a username and password when logging into an AWS account.