What is an IRA?
Author: DanielBeckett Total views: 13 Word Count: 399
IRAs are a form of retirement fund that allow US citizens to lower their tax owed. IRAs can either be offered by employers or created by individuals. Since funds are contributed directly to IRAs, most are tax free under US tax law.
Types 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.
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).
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.
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.
Distributions
One of the major drawbacks to IRAs is that there are penalties levied on funds withdrawn before retirement age. In this case, 59.5 is considered the earliest age an individual can withdraw without penalties. There are some exceptions, however, such as allowances for educational expenses or a sum allowed for withdrawal when an individual buys their first home.
There are also penalties associated with holding funds in IRAs too long - if no withdrawals are made before the holder reaches 70.5 years, funds in the IRA will begin to be lost.
Management
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.
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