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.
Previous versions of US tax law included other forms of IRAs. Rollover, Conduit, and Educational IRAs are no longer available for formation under current US tax law.
Tax treatments of most IRA types are very similar, with the exception of Roth IRAs.
Deposits
Money is the only type of asset allowed for contribution to IRAs. The current limit on deposit is $5000 a year, with an additional $1000 allowed for anyone over age 50. Whatever the age, no one can deposit more than their yearly income.
Money can almost always be transferred between IRAs and other retirement funds. There are a few exceptions, but in general IRAs and other retirement accounts can accept funds from one another freely.
Getting the Money Out
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.
There are also penalties associated with holding funds in IRAs too long - if no withdrawals are made before the holder reaches 70.5 years, funds in the IRA will begin to be lost.
Direction
With the exception of Self-Directed IRAs, IRAs are generally managed by designated managers. IRAs are usually composed of securities. Some other assets are often allowed, but many managers discourage their inclusion.