An Individual Retirement Account (IRA) is a kind of “individual retirement plan” launched by many financial institutions that provides tax benefits for retirement savings. An individual retirement account is an individual retirement agreement as stated in IRS Publication 590, Individual Retirement Arrangements (IRA). The term IRA, used to describe both individual retirement accounts and the broader category of individual retirement arrangements, includes an individual retirement account; a trust or custodian account created exclusively for taxpayers or their beneficiaries; and an individual retirement annuity through which taxpayers purchase an annuity or endowment agreement from a life insurance company.
Types of IRA
There are several types of IRAs:
Traditional IRA – contributions are often tax-free, all transactions and income under the IRA have no tax consequences. Withdrawals are subject to retirement taxed as income. A traditional IRA can be a “deductible” or a “non-deductible” depending on the nature of the contribution. Traditional IRAs were introduced with the Pension Security Act of 1974 (ERISA) and became popular with the Economic Recovery Tax Act of 1981.
Roth IRA – Contributions are made with assets after tax, all IRA transactions have no tax consequences, and withdrawals are tax-free. Named after Senator William W. Roth, Jr., the Roth IRA was introduced as part of the 1997 Taxpayer Benefits Act. myRA is a 2014 Obama administration initiative based on the Roth IRA SEP IRA – a provision that allows an employer (typically a small business or sole proprietor) to contribute to a retirement plan in a Traditional IRA in the employee’s name rather than a retirement fund in the name of the company.
Simple IRA is an employee savings plan that requires an employer to match contributions to the plan whenever an employee makes a contribution. The plan is similar to the 401 (k) plan, but with lower contribution limits and easier (and therefore less costly) administration.
Rollover IRA – There is no real tax treatment difference from a traditional IRA, but funds come from a Qualified Plan or 403 (b) account and are “carried over” to a rollover IRA rather than being deposited in cash. No other assets are pooled with these rollover amounts.
Conduit IRA – A tool to transfer qualified investments from one account to another. To preserve certain special tax regimes, funds cannot be pooled with other asset types, including other IRAs.
Save money with an IRA
You can deposit up to $ 5,500 per year into your Individual Retirement Account (IRA), or even more if you are over 50. You can also start with a smaller amount. These accounts also offer tax benefits.
When you open an IRA, you have two options – Traditional or Roth IRA. Taxation will depend on which option you choose. In addition, the “net” value of your withdrawals will depend on inflation and the type of IRA you choose. Such accounts make it easy to save money. You can set them up so that the amount is automatically withdrawn from your checking (or savings account) and deposited in the IRA.
A new type of Roth IRA called myRA is a retirement account created by the US Treasury to help you save for retirement if you do not have access to such a plan at work.