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An Individual Retirement Account, or IRA, is a retirement plan that provides tax advantages for retirement savings within United States tax law. Unlike 401k plans, which must be provided by an employer, IRAs can also be created by an individual. Aside from one specific type, IRAs contributions are made before tax.

Types of Individual Retirement Accounts

Individual Retirement Accounts come in a variety of forms, each with different distinguishing characteristics. Traditional IRAs are the most generic form of IRA, and are generally what people refer to when they don’t specify an IRA type. Roth IRAs, on the other hand, allow tax free withdrawals, as money is taxed as it is deposited.

Though Traditional and Roth IRAs are the most popular, there are several other forms of IRAs, including SEP IRAs (which are often used by smaller companies or self-employed people), SIMPLE IRAs (more similar to 401(k) plans than other IRAs), and Self-Directed IRAs (which allow an individual to manage their own fund).

There were formerly several other types of IRAs, including Rollover, Conduit, and Educational IRAs. These have either been eliminated, or renamed in the case of Educational IRAs.

Tax treatments of most IRA types are very similar, with the exception of Roth IRAs.

Paying into IRAs

Only cash can be contributed to IRAs. As of 2008, the contribution limit for IRAs is $5000 per year, or $6000 if the individual is 50 years of age or older. However, contributions cannot be more than the annual income of the holder.

Funds can be transfered between IRAs and most other retirement accounts. There are a few exceptions, but for the most part IRAs and other retirement accounts can be freely combined.

Distributions

Like most retirement plans with tax benefits, there are strong penalties for withdrawing funds before reaching retirement age, here defined as 59 and 1/2 years. However, there are a handful of exceptions, including education expenses for the holder or their children and grandchildren, disability, and a one-time withdrawal to buy a first home.

In addition, withdrawals must be made after the holder reaches the age of 70 and 1/2 years, or half the money that should have been distributed will be lost.

Management

With the exception of Self-Directed IRAs, IRAs are generally managed by designated managers. IRAs are usually composed of securities. Some other assets are often allowed, but many managers discourage their inclusion.

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Tags: Finance //