Individual Retirement Accounts

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 IRAs

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.

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.

Previous versions of US tax law included other forms of IRAs. Rollover, Conduit, and Educational IRAs are no longer available for formation under current US tax law.

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 money can be deposited in IRAs. At the moment, $5000 is the annual contribution limit for most people, though anyone over 50 years of age can deposit an additional $1000. However, no one can give more than their annual income.

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IRAs also require the holder to withdraw funds at a certain point, or the funds that should have been withdrawn will begin to be lost.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

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.