What is an IRA?
An IRA is a type of retirement plan that allows significant tax benefits for savings in US tax law. Unlike some plans, IRAs can either be offered by an employer or created by an individual. Most IRAs allow contributions to be made before taxes are removed from an individuals paycheck.
Forms of IRAs
Different types of IRAs work in different ways. Traditional IRAs have no real distinguishing characteristics. Roth IRAs are perhaps the most different in intent, as the funds are taxed before contribution, allowing tax free withdrawals later in life.
Other types of IRAs include SEP IRAs, which are generally used by small businesses or self-employed individuals, SIMPLE IRAs, which are similar to simplified 401k plans with low contribution limits and simple administration, and Self-Directed IRAs, which are managed by the holder, rather than a designated custodian.
Though there were once several other types of IRAs, these forms are now obsolete. These eliminated forms include Rollover, conduit, and Educational IRAs.
Despite their differences, the tax treatments required for IRAs are very similar. The only major difference is for Roth IRAs, which are taxed at withdrawal instead of deposit.
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.
IRAs also require the holder to withdraw funds at a certain point, or the funds that should have been withdrawn will begin to be lost. When a holder reaches the age of 70 and 1/2, they must begin withdrawals.
Direction
IRAs are almost always managed by a designated third-party, with the noted exception of Self-Directed IRAs. Most IRAs are consist entirely of securities, though some managers allow the inclusion of other specifically allowed assets.
If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
