An IRA Introduction
An IRA is an individual retirement account that has two very big benefits: compound interest and tax savings. Your IRA will be the key to a long and enjoyable retirement so if you have money that you can put into an IRA and forget about, there is no reason why not to do it. However, understanding the different types of IRAs and what you can do with them can be very confusing, so the following introduction will get you started in learning all about IRAs and their benefits.
Anyone who gets taxable compensation during the year can open an IRA account. However, both a husband and wife can have their own IRA account even when only one person in the marriage is working. It should be noted that you are limited in how much you can contribute into an IRA each year. There are no taxes on an IRA until the money is withdrawn. With a Roth IRA even withdrawals may be untaxed. However, you can never deduct contributions to a Roth IRA on your taxes while if you meet certain requirements you may be able to deduct contributions to a traditional IRA.
Money can be taken out from an IRA at any time. If you are taking money from a traditional IRA you will be subject to traditional income tax rates. If you take money out of an IRA account before you reach the age of 59 ½ you will be subjected to a 10% excise tax on top of the income tax. There are several exceptions that allow you to take money out of an IRA before you reach the age of 59 ½ and not have to pay the 10% penalty. These include disability, death, education, first time home purchase, medical expenses, and to pay back taxes. All of these exceptions still require that the IRA be taxed at traditional income rates, except in the case of a Roth IRA or an Education IRA.
Types Of IRAs
There are 9 different types of IRAs that you can use to plan for your retirement. It is highly unlikely that you will need all of them or even most of them. But understanding what each of them has to offer can make a huge different in your retirement planning.
- Individual Retirement Account – This is a traditional or Roth IRA that you set up with some sort of financial institutions. This money can then be invested in different securities like stocks, bonds, metals, money market and CDs.
- Individual Retirement Annuity – this is nearly the same as an Individual Retirement Account but it is set up with a life insurance company.
- Employer and Employee Association Trust Account – this is more commonly known as a group IRA and it is a traditional IRA that is setup by either an employer, union or an employee association for employees or members.
- Simplified Employee Pension (SEP-IRA) – this is another type of traditional IRA that is set up by an employer for all of their employees. This type of account allows an employer to contribute $30,000 or 15% of an employee’s salary annually to their IRA.
- SIMPLE – IRA – This is a another traditional IRA that is set up by a small employer for their employees. With this type of IRA an employee can contribute a certain amount of money into the IRA and the employer will then match the employee’s contribution based on a percentage of the employee’s pay.
- Spousal IRA – This is either a traditional or Roth IRA that is funded by a married tax payer for their spouse who receives less than $2,000 in yearly salary. It is important to note that any year that a contribution is made to this IRA the couple must file taxes jointly.
- Rollover IRA – this is year another form of traditional IRA in which an individual receives a distribution from a retirement plan.
- Inherited IRA – This is an IRA that is passed down to a non-spousal beneficiary of a deceased IRA owner. This type of IRA can be traditional or Roth IRA.
- Education IRA- this is an IRA that is established in order to provide funds that will allow a beneficiary to pay for higher education. There is no tax deduction for contributing to this IRA but withdrawals are not taxed.
All of these different types of IRA can be hard to understand and it can be confusing to figure out which one is the right option for you and your retirement plan. If you already have an IRA and you want to transfer the money or invest it differently you will need to speak to a financial adviser to learn what your options may be. There are several investment brokers that can also help you invest your IRA funds differently, whether you want them in stocks, bonds or even precious metals.