IRA stands for individual retirement account, a U.S. method of investing for the future after work is no longer an option. There are many different types of IRAs: individuals can start them personally, or create an IRA through a work plan. The funds in an IRA can be invested in many different securities or assets, based on the type of account and the financial institution that manages it. A qualified IRA is often associated with several kinds of useful tax benefits.
Roth IRAs are a specialized type of IRA that includes several tax features that help shelter the account from income tax, which can lower returns. Roth IRAs were introduced in 1998 and make several key changes to the traditional IRA format. In a traditional IRA, many payments made into the fund are tax deductible themselves, but any money withdrawn during retirement is taxed according to an income tax rate. A Roth IRA does not include the option to make tax-deductible payments, but does not require taxes on what are known as qualified distributions.
In a Roth IRA, qualified distributions are defined by several different factors. The distributions, or withdrawals, can only be made after the account holder turns 59 1/2 years old, the official retirement date according to the IRS. Account holders can withdraw money from the IRA before then, but it may be subject to penalties and will incur income taxes, making it a less useful way to invest money.
Exceptions to Age Limits
Roth IRAs have several exceptions to the 59 1/2 age limit to make room for circumstances beyond the control of the account holder. For instance, if the account holder dies, qualified distributions can be made to a beneficiary or estate. If the account holder becomes legally disabled according to IRS guidelines, qualified distributions can be withdrawn. Also, due to more recent legislation, qualified distributions can be used to pay for qualified first-time homebuyer expenses.
Sometimes an account holder may prefer to rollover money from one IRA into another. Sometimes these rollovers may be qualified too, but the guidelines are strict and taxes are usually applied unless the amount is below a specific amount and rolled over from a traditional or Roth IRA into a Roth IRA only.