A
retirement investment vehicle available to US
citizens. These accounts were created in 1974 by the
landmark Employee Retirement Income Security Act, or
ERISA.
In general, individuals may establish
IRAs, contribute money to the account, and direct the assets into many types of investments. These accounts are often referred to as "
self directed" IRAs, though in general the statement is
redundant. Today, there are several types of IRA, including
Traditional IRAs and
Roth IRAs.
Contributions
Each year, investors who receive income (including alimony) may contribute money to the IRA, subject to certain limits. In the case of a Traditional IRA, the annual maximum is equal to the lesser of:
Investors choosing a Roth IRA may see their contributions limted or eliminated if their income exceeds $150,000.
Contributions must generally be made by the federal income tax filing deadline (usually April 15) in order to count toward a certain celndar year. For example, if I make a $2,000 contribution on 1 April, 2001, I can ask that that be considered as a contribution for 2000. If I make a contribution on 1 May, 2001, I must consider it a contribution for 2001.
Tax Benefits
The assets in an IRA grow free from current taxes. That is, you pay no taxes on the money while it remains in the account. There are also compelling tax advantages specific to Roth and Traditional IRAs:
- Investors choosing a Traditional IRA may be able to deduct the amount of their contribution from their income taxes in the year in which it was made. However, amounts withdrawn from the account during retirement may be taxable in they eyar they are made.
- Investors choosing a Roth IRA will not be able to deduct any contribution amounts. However, withdrawals made at retirement will generally be tax free, assuming the assets have been in the account for a minimum of five years.
Investment Choices
Investors can choose to direct their IRA assets into almost any kind of security, excluding items such as real estate and certain collectibles. Investors may generally switch investments as they see fit, subject to any restrictions imposed by their IRA provider (a bank, brokerage firm, mutual fund company, etc.).
Accessing the Cash
Investors may generally begin withdrawing money from an IRA (without penalty) after they attain age 59 1/2. In the case of Traditional IRAs, investors must begin taking distributions after they reach age 70 1/2, though Roth IRA investors are never compelled to begin taking distributions. Distributions made before the account owner reaches age 59 1/2 may be subject to a 10% early withdrawal penalty. Exceptions may be made in the case of economic hardship or if the withdrawals are part of a series of substantially equal payments spread over the life expectancy of the owner.
For more comprehensive information, consult one of my best friends, IRS Publication 590: Individual Retirement Arrangements, available at www.irs.gov.