Stockbrokers.com is currently in the middle of a special series on retirement accounts (Read Part 1, Part 2). Planning for retirement is one of the most important tasks you’ll ever have. An Individual Retirement Account, also called an IRA, is an investing tool used by individuals to earn and set aside money for retirement. The IRA has grown in popularity over the years as more of the public becomes aware of the huge benefits of this retirement savings account.
IRA Account Basics
The Individual Retirement Account was introduced in 1974 along with the enactment of the Employee Retirement Income Security Act (ERISA). An IRA can only be funded by cash or cash equivalents. After an account is funded, the IRA owner can use the cash in their account to purchase many different types of securities, as well as some non-security financial instruments. The law requires each investor to have an IRA custodian. An IRA custodian is the financial institution who maintains the investor’s assets. Keep in mind that the IRS allows specific custodians to impose their own policies regarding IRA accounts. This means that investors should always shop around for a financial institution that allows investments in areas where you plan to make in your Individual Retirement Account. When choosing your investments in this type of account, make sure you remember that this is a retirement account and the money is not easily accessible without penalties. The Traditional IRA was the first IRA, so it is sometimes called the Regular IRA. The IRS only allowed $1,500 per year in contributions when the IRA account was started, but currently the annual limit is $5,000.
Types of IRA Accounts
It is hard to believe, but there are now 11 types of IRA accounts available! Some types of IRA such as a Group IRA and a Spousal IRA are very rarely used. At the same time, there are other new types of IRA accounts that are growing quickly. Let’s take a quick look at the four most commonly used IRA accounts.
1. Roth IRA– The most popular IRA account, largely because it is the only type of IRA where qualified distributions are not taxable. Individuals can earn through the years and then withdraw their money after the age of 59.5 without paying any taxes.
2. Traditional IRA– The second most popular IRA account, which comes with a large benefit of tax-deductible contributions. Withdrawals must begin by the age of 70.5 in this type of IRA account.
3. Simplified Employee Pension (SEP IRA) – This is an IRA that is established by an employer. Employers may make tax-deductible contributions on behalf of eligible employees inside this plan. Self-employed individuals can also use a SEP IRA.
4. Simple IRA– This is a Traditional IRA that is setup by a small employer for their employees. This plan is being used far more frequently in recent years, as it allows small businesses to offer retirement plans to employees without the financial burden of a 401k plan.
Benefits of an IRA
An IRA comes with many benefits for the participant. The tax benefits associated with these accounts are tremendous. The ability to receive tax-deferred or tax-free withdrawals is a huge benefit that cannot be overstated. Having an IRA also fosters an environment where you are far more likely to save money for your future. There are now multiple account types available, which means that you should be able to find the perfect type of IRA for you! Make sure you find the best online broker to manage your IRA with.