What is an Individual Retirement Account – IRA
No matter how nice we may have it, we still have to live responsibly. This week, I would like to talk about something that pertains to all of us, no matter what age bracket you may be in. Let us visit the general parameters of an individual retirement account (IRA). An IRA is an investing tool used by individuals to earn and allocate funds for retirement savings. There are number of different types of IRAs, which may be either employer-provided or self-provided plans. The types include:
Roth IRA – Contributions are made with after-tax assets, all dealings within the IRA have no tax impact, and withdrawals are usually tax-free. This retirement tool was named after Senator William Roth.
Traditional IRA – Contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made by means of pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal equivalent to contributions that were not deducted). Depending upon the nature of the contribution, a traditional IRA may be referred to as a “deductible IRA” or a “non-deductible IRA.”
SEP IRA – A stipulation 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 simplified employee pension plan that allows mutually employer and employee contributions, similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) administration cost. Although it is termed an IRA, it is treated separately.
Self-Directed IRA – A self-directed IRA allows the account holder to make investments on behalf of the retirement plan.
There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed as obsolete under current tax law (their functions have been subsumed by the Traditional IRA) by some; but this tax law is set to expire unless extended. However, some individuals still maintain these accounts in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs.
Thought you should look at this as a simple overview of the subject matter, I strongly encourage you to talk to you local Financial Planner. Over the years, I have served many elder clients who had failed to save for a “rainy day”. You can never be too young (or old!) to start looking into saving for your golden years. When that day comes, which is always sooner than anticipated, you will be grateful for that first day you got started. Taking control of your financial future is an empowering feeling, with no downside at all. So please take charge and make an appointment with a qualified Financial Planner!