Individual Retirement Account

An individual retirement account (IRA) is essentially a savings account that allows individuals to keep certain amount of money aside every year and delay the payment of taxes on their earning until a future period i.e. when they begin withdrawing the money at the age of 59 or later. An individual retirement account can be created with the help of a bank, brokerage or mutual fund. Those members who don’t participate as well as meet specific income related guidelines can contribute to their individual retirement account by allowing their incomes to be deducted appropriately whereas all the others can contribute to their IRA on the basis of non-deduction.

Types of Individual Retirement Account

There are varied types of Individual Retirement Accounts, however, not everyone can open each type of individual Retirement Account and they must meet certain criteria based on their employment and income status to be able to open an Individual Retirement Account. While each of the Individual Retirement Accounts has a definite limit as far as contributing money in them is concerned, the contributor may have to pay certain penalties, in case he chooses to withdraw money before the age of retirement.

Traditional IRA: In a traditional IRA, the money is contributed before deducting tax. All the earnings and transactions within the Individual Retirement Account have no tax implications and the money that is withdrawn at the time of retirement is taxed as income. Based on the contribution’s nature, a traditional Individual Retirement Account is referred to as ‘deductible Individual Retirement Account’ or a ‘non-deductible Individual Retirement Account’.

SEP IRA: This type of an IRA is essentially a provision, which permits an employer (usually a self-employed person or small organization) to contribute for the retirement plans into a traditional IRA that is set up in the name of the employee.

Roth IRA: In Roth IRA, the contributions are done after deduction of tax, all the transactions done within the account are not affected by tax and even withdrawal of money can be done free of tax.

SIMPLE IRA: Also known as Savings Incentive Match Plan for Employees, SIMPLE IRA demands that the employer makes the same amount of contributions to the account every time an employee contributes to the plan.

Self-Directed IRA: This type of IRA allows the holder of the account to invest on behalf of the retirement plan.