Basic Information on IRAs

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.

Forms of IRAs

There are a number of different types of IRAs that offer different advantages. Traditional IRAs are the base, and the difference is what defines the other IRA types. Roth IRAs differ from other IRAs in that contributions are made after tax, so withdrawals are tax free.

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.

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.

Deposits

Money is the only type of asset allowed for contribution to IRAs. The current limit on deposit is $5000 a year, with an additional $1000 allowed for anyone over age 50. Whatever the age, no one can deposit more than their yearly income.

Money can almost always be transferred between IRAs and other retirement funds. There are a few exceptions, but in general IRAs and other retirement accounts can accept funds from one another freely.

Getting the Money Out

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IRAs also require the holder to withdraw funds at a certain point, or the funds that should have been withdrawn will begin to be lost.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