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An IRA is a type of retirement plan that allows significant tax benefits for savings in US tax law. Unlike some plans, IRAs can either be offered by an employer or created by an individual. Most IRAs allow contributions to be made before taxes are removed from an individuals paycheck.

Types of Individual Retirement Accounts

There are a number of different types of IRAs that offer different advantages. Traditional IRAs are the base, and the difference is what defines the other IRA types. Roth IRAs differ from other IRAs in that contributions are made after tax, so withdrawals are tax free.

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.

There were formerly several other types of IRAs, including Rollover, Conduit, and Educational IRAs. These have either been eliminated, or renamed in the case of Educational IRAs.

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.

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

One of the major drawbacks to IRAs is that there are penalties levied on funds withdrawn before retirement age. In this case, 59.5 is considered the earliest age an individual can withdraw without penalties. There are some exceptions, however, such as allowances for educational expenses or a sum allowed for withdrawal when an individual buys their 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.

IRA Holdings

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.