uccess With Money
uccess With Money
Your Personal Guide to Achieving Success With Your Money and Your Life
Individual Retirement Accounts, known simply as IRA’s, can sometimes be confusing. There are traditional IRA, Roth IRA, SEP IRA, Simple IRA, and Self-Directed IRA accounts. In addition there are Coverdell Educational Savings Accounts that used to be called Educational IRA’s.
Here are the basics you need to know. IRA’s are retirement savings/investment accounts that receive some type of favorable tax treatment to encourage people to save for retirement. Many people choose to manage their own investments but most investment advisors offer management services as well.
Almost any investment may be included and a variety of investments are often included in a single IRA account. Almost any financial institution that offers investment opportunities of any kind also offers IRA accounts.
The traditional IRA, created in 1954, is best known and has been widely used. Most of the others in this group are quite similar except for their special areas of application.
The SEP IRA, for example, is designed to help small business owners assist themselves and their employees with a common retirement plan when other plans might not be feasible. With this plan, employers can contribute directly to IRA accounts that are in the name of the employee.
A Simple IRA is similar in some ways in that it is designed for small businesses but it operates more like a 401k. It does have a more "simple" administrative load than a 401k, however.
For the abitious (and more knowledgeable), there is the self-directed IRA. This IRA is distinguished by its provision for the owner to personally choose investments to place into the fund. Most funds allow many choices but this one allows more unusual investments such as real estate.
For many individuals the newer Roth IRA has become a preferred form of retirement investment. It is quite different from other IRA’s and is treated in a separate article.
For others, however, the traditional IRA is still the preferred form. It has several important characteristics.
The most notable attraction of a traditional IRA is that the investments are deductible from income when paying taxes. While originally the maximum contribution was only $2,000.00 anually for an individual, depending on income that can now be as much as $6000.00. This means it can make a significant impact on income taxes.
Since deposits are originally deducted from income, however, principal withdrawals are taxable income, as is any appreciated value. And withdrawals must begin at age 70½, so if income is anticipated to be high at that time the tax rate could be significant.
Early withdrawals (under age 59½) are subject to hefty fees (10%) in addition to income tax. There is also a significant penalty for not withdrawing required amounts beginning at age 70½, so care must be taken to understand the technical requirements of the traditional IRA for anyone deciding to use it.
A number of special rules have been adopted allowing early withdrawal for specified purposes. Up to $10,000 may be withdrawn for a first home. Money for medical expenses, higher education, certain medical expenses, health insurance and a few other uses may be withdrawn without penalty, under certain conditions.
