A Guide to IRA Accounts
An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings. There are a number of different types of IRA accounts, some being employer provided plans and others you set up yourself.
In a traditional IRA, the money is deposited before being taxed. It accumulates tax free on earnings until being withdrawn at retirement, at which point the money is taxed.
Since the money is contributed before taxes, you take a tax deduction for it (some exceptions), then let it grow until retirement. So, when you retire (presumably in a lower tax bracket) the money is taxed.
The main restriction on this one is that your annual contributions are only tax deductible if you’re not covered by a pension, 401K, or any other retirement plan where you work. You can contribute only certain amounts per person into a Traditional IRA each year if you’re under age 50, or slightly more if you’re over age 50.
A SEP IRA is a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund account in the company’s name.
A simple IRA is a simplified employee pension plan that allows both employer and employee contributions, similar to a 401(k), but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately.
In the past, Education IRAs were fairly low brow with a very low maximum contribution. As of 2002, however, these investments became really useful by allowing you to contribute a much larger amount per child per year (subject to some income limitations). The money goes into a custodial account for benefit of the child to pay his/her qualifying education expenses.
Also, you can now use an Education IRA to pay for any kind of education, public or private, grade school, high school or college. It can also be used to pay for virtually any education-related expense, too tuition, fees, books, supplies, room and board, uniforms all that stuff.
Some rules to remember
Most retirement plans can be rolled into IRAs after meeting certain criteria, and most retirement plans can accept funds from an IRA. There are a few things that cannot be funded into an IRA, however. They include collectibles including valuable coins or life insurance. IRAs cannot generally hold real estate unless it is held as a form of security such as a real estate investment trust (REIT), or if the IRA is held by a custodian who makes all transactions. There are certain special restrictions on real estate held in an IRA, and IRA’s are exempt from most bankruptcy proceedings.
Unlike 401(k) accounts, borrowing against IRAs is generally not allowed. However, the rules regarding IRAs allow assets in them to be transferred from one account to another. This can be used to temporarily “borrow” money from the IRA, once per year. The money must be placed in another IRA account within 60 days to qualify as an “indirect rollover” and avoid taxes and penalties.
If you open an IRA account at your place of employment, most will allow you to keep the account even after you no longer work for them. Be sure to check with your employer on all policies concerning your IRA and whether or not the account will remain active after your employment has been terminated.
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