Real Estate Innovation

Basic Information on IRAs

An IRA is a type of retirement plan that allows significant tax benefits for savings in US tax law. Unlike some plans, IRAs can either be offered by an employer or created by an individual. Most IRAs allow contributions to be made before taxes are removed from an individuals paycheck.

Types of IRAs

Individual Retirement Accounts come in a variety of forms, each with different distinguishing characteristics. Traditional IRAs are the most generic form of IRA, and are generally what people refer to when they don’t specify an IRA type. Roth IRAs, on the other hand, allow tax free withdrawals, as money is taxed as it is deposited.

Other types of IRAs include SEP IRAs, which are generally used by small businesses or self-employed individuals, SIMPLE IRAs, which are similar to simplified 401k plans with low contribution limits and simple administration, and Self-Directed IRAs, which are managed by the holder, rather than a designated custodian.

Though there were once several other types of IRAs, these forms are now obsolete. These eliminated forms include Rollover, conduit, and Educational IRAs.

Tax treatments of most IRA types are very similar, with the exception of Roth IRAs.

Paying into IRAs

Only cash can be contributed to IRAs. As of 2008, the contribution limit for IRAs is $5000 per year, or $6000 if the individual is 50 years of age or older. However, contributions cannot be more than the annual income of the holder.

As a general rule, money can be transfered freely between IRAs and other retirement accounts, though there are a few unusual exceptions to this rule.

Withdrawals

One of the major drawbacks to IRAs is that there are penalties levied on funds withdrawn before retirement age. In this case, 59.5 is considered the earliest age an individual can withdraw without penalties. There are some exceptions, however, such as allowances for educational expenses or a sum allowed for withdrawal when an individual buys their first home.

There are also penalties associated with holding funds in IRAs too long - if no withdrawals are made before the holder reaches 70.5 years, funds in the IRA will begin to be lost.

Direction

With the exception of Self-Directed IRAs, IRAs are generally managed by designated managers. IRAs are usually composed of securities. Some other assets are often allowed, but many managers discourage their inclusion.