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.
Traditional IRA 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being withdrawn at retirement, at which point the money is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.
SEP IRA
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.
SIMPLE IRA
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.
Education IRA
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.
You may freely reprint this article provided the following
author's biography (including the live URL link) remains intact:
About the author:
John Mussi is the founder of Direct Online Loans who help
homeowners find the best available loans via the
www.directonlineloans.
co.uk website.
