Facts About IRAs
Retirement is a life stage you can no longer afford to take lightly. Gone are the days when the assurance of Social Security and a check from your company pension plan made worrying about retirement finances unnecessary. Today, the responsibility for ensuring your retirement years are comfortable and affordable is for the most part, yours. Whether or not your current employer offers a company retirement plan, an option that deserves consideration is an Individual Retirement Account, or IRA.
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Definition
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Although there are a variety of different types of IRAs to choose from, any IRA can fit within the general description of an account that provides significant tax breaks for retirement savings. In addition, while each type has its own structure, eligibility requirements and regulations, they all function using the same general process. You open the account, choose the investments you want to place in the account, make monthly contributions to fund the account and begin receiving distributions from your IRA when you retire.
Types
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The two most common types of IRAs are traditional and Roth accounts. The traditional IRA is also the original IRA, introduced in 1974 with the enactment of the Employee Retirement Income Security Act. Until 2008, this type of IRA was only available to you if your employer did not include a retirement plan as part of your employee benefits. The Roth IRA, introduced in 1997 as part of the Taxpayer Relief Act, is a plan open to everyone since its inception. Other types of retirement IRAs include the Simplified Employee Pension, or SEP IRA, and the Simplified IRA, both of which are employer-sponsored plans.
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Features
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Differences in the method of taxation are the main distinguishing feature of each type. A traditional IRA features contributions not subject to tax until you begin making withdrawals, as long as your adjusted gross income, or AGI, does not exceed income eligibility limits the IRS reviews each year. In contrast, contributions you make to a Roth IRA are subject to tax at the time you contribute but are tax-free when you begin making withdrawals. As of 2010, the IRS reports that both plans feature contribution limits of $5,000 per year if you are under the age of 50 and $6,000 per year if you are age 50 or older.
Special Considerations
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It is even possible to start saving for your child's retirement. IRS regulations allow you, as a parent, to set up and manage a custodial IRA, choosing either a traditional or Roth format, and contribute up to $5,000 per year. It is also possible to inherit an IRA, and while you cannot contribute to this account, you do have the option of deferring any tax liability if you wait until you retire to make any withdrawals.
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References
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