What Is An IRA? What Are The Different Kinds Of IRA’s?
An “IRA” is an “Individual Retirement Account”. IRA accounts provide tax advantages when people invest in these funds, because someone saving in an IRA doesn’t have to pay taxes until the money is withdrawn. This makes the IRA an ideal account for those saving for retirement. IRAs are sometimes referred to as an “Individual Retirement Arrangement”.
Different Kinds of IRAs
There are several different kinds of IRAs you can invest in. You’ve probably heard of several of these.
- Traditional IRA – These can also be known as “deductible IRA” and a “non-deductible” IRA, depending on the nature of funds you placed in this IRA. Typically, a traditional IRA user places tax-deductible money into the plan and both this transaction and whatever earnings you receive from the IRA are not taxed until you withdraw them. When this happens, the withdrawn funds are taxed as income.
- Roth IRA – Withdrawal of retirement funds from “Roth IRAs” have no tax penalty, because the money you invest are made after you pay taxes on the money. “Roth IRA” plans are named for the late Republican Senator William Roth of Delaware, who served in the Senate from 1971 to 2001 (and the House of Representatives from 1967 to 1971). The Roth IRA was created in 1998. There is also a Roth 401k, which was created in 2006.
- SIMPLE IRA – This is not really an IRA in the classic sense, the “Simple IRA” is a simplified pension plan for employees. The “SIMPLE IRA” includes both employee and employer contributions to the savings and is very similar to a 401(k) plan, though the contribution limits are lower than a 401k.
- SEP IRA – This is an alternative pension savings account which some companies use in lieu of a traditional pension fund. With the “Sep IRA”, your employer makes contributions into a traditional IRA in your name. Small businesses and self-employed individuals tend to use SEP IRAs.
- Self-Directed IRA – Instead of your employer, a bank or a trustee making investments on behalf of your IRA, the person who owns the IRA account make investments in the Self-Directed IRA. This allows someone greater flexibility in their retirement investments in a tax-free environment, but exposes the unskilled investor to the risk of ruin.
Investing Limit on IRAs
The investing limit on IRAs are usually $4,000 per year in them. You can split your investments in IRA funds between two or more funds. People over 50 years of age are generally allowed to invest $5,000 per year in an IRA fund.
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