An Individual Retirement Account, or IRA, is a retirement plan that provides tax advantages for retirement savings within United States tax law. Unlike 401k plans, which must be provided by an employer, IRAs can also be created by an individual. Aside from one specific type, IRAs contributions are made before tax.

Types of Individual Retirement Accounts

Different types of IRAs work in different ways. Traditional IRAs have no real distinguishing characteristics. Roth IRAs are perhaps the most different in intent, as the funds are taxed before contribution, allowing tax free withdrawals later in life.

SEP IRAs are generally offered by small businesses or self-employed indivuals. SIMPLE IRAs are more similar to 401(k) plans than other IRAs, though they have lower contribution limits and simplified administration. Self-Directed IRAs allow the holder to manage the fund themselves, rather than appointing a manager.

Though there were once several other types of IRAs, these forms are now obsolete. These eliminated forms include Rollover, conduit, and Educational IRAs.

Except for Roth IRAs, all IRAs are taxed at withdrawal.

Paying into IRAs

Only cash can be contributed to IRAs. As of 2008, the contribution limit for IRAs is $5000 per year, or $6000 if the individual is 50 years of age or older. However, contributions cannot be more than the annual income of the holder.

As a general rule, money can be transfered freely between IRAs and other retirement accounts, though there are a few unusual exceptions to this rule.

Distributions

Like most retirement plans with tax benefits, there are strong penalties for withdrawing funds before reaching retirement age, here defined as 59 and 1/2 years. However, there are a handful of exceptions, including education expenses for the holder or their children and grandchildren, disability, and a one-time withdrawal to buy a first home.

In addition, withdrawals must be made after the holder reaches the age of 70 and 1/2 years, or half the money that should have been distributed will be lost.

Direction

IRAs are almost always managed by a designated third-party, with the noted exception of Self-Directed IRAs. Most IRAs are consist entirely of securities, though some managers allow the inclusion of other specifically allowed assets.

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