What is an IRA ?
What is an IRA? An IRA is an Individual Retirement Account, and provides the account owner with either a tax-deferred or tax-free way of saving toward retirement. There are many different kinds of IRAs, and the choice of which is right for an individual depends on their particular situation and financial goals. An IRA is really a savings plan with many restrictions. In a Traditional IRA, the account owner defers paying taxes on the contributions and earnings of these savings until the funds are withdrawn. Funds cannot be distributed until the owner reaches age 59 ½ years old, and any early withdrawal prior to that will be subject to a stiff penalty. Every individual retirement account has its own tax implications and requirements for eligibility. In a Roth IRA, contributions to the account are made with after-tax money so all transactions within the account have no tax impact on the owner. Distributions from the Roth IRA are tax free, as long as the owner has reached age 59 ½ and the account has existed for five years. Instead of giving a tax break for IRA contributions, the Roth IRA grants the benefit at withdrawal, and allows the investment earnings to grow tax free in the account. What is an IRA? It’s simply the account that holds the investments. So choosing a Traditional IRA, a Roth IRA, a SEP IRA or any other type of individual retirement account will depend on the investor and their philosophy. Many people choose either a Roth or Traditional IRA, but opt for the self-directed option. A self-directed IRA puts the ultimate control in the hands of the account owner, who makes the critical decisions for the plan. With a self-directed IRA, the owner decides on the custodian firm to hold the account. Often they choose a custodian with expertise in alternative investments, allowing non-traditional choices beyond the conventional stocks, bonds and mutual funds to include tax liens, real estate and real estate notes, even precious metals. The custodian company executes investments at the direction of the account owner, and on the owner’s behalf. Depending on the IRA type, there are qualifying factors and contribution limits. Regulations vary on valid investments, although a self-directed IRA allows for more options. The custodial firm holding the account can determine the menu of investment products available, so the choice of a custodian is critical and often made dependant on the options offered. Individual Retirement Accounts were introduced in 1974 through the enactment of the Employee Retirement Income Security Act. In 1981, the Economic Recovery Tax Act made it possible for all taxpayers under the age of 70 ½ to contribute to an IRA, regardless of their coverage under an employment-based pension plan. What is an IRA? It is simply a retirement plan account providing retirement savings advantages to the American taxpayer.