Difference between revisions of "Individual retirement account"

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An '''individual retirement account''' ('''IRA''') is a personal savings plan which allows you to [[investment|invest]] or set aside [[money]] for [[retirement]], while offering you [[deferred tax]] / [[tax]] advantages.<ref>https://www.irs.gov/taxtopics/tc451.html</ref>
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An '''individual retirement account''' ('''IRA''') is a personal savings plan which allows you to [[investment|invest]] or set aside [[money]] for [[retirement]], while offering you [[deferred tax]] / [[tax]] advantages.<ref>https://www.irs.gov/taxtopics/tc451.html</ref> These are technically known as "defined contribution" plans, since (unlike a traditional pension, or "defined benefit" plan) the only known amount is how much is contributed, there is no guarantee of any specific level of income at withdrawal (and could lose some or even all of its value).
  
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There are two types of IRA's: traditional and Roth. In a traditional IRA, the contributions are not taxed (either by being taken out of a paycheck and set aside in an account prior to tax withholding, or by individual contributions which are deductible from taxable income), but are taxed when withdrawn. In a Roth IRA, the contributions are taken from post-tax dollars, but only earnings on the IRA are taxed upon withdrawal.
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There are two types of IRA's: '''traditional''' and '''Roth'''.
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*In a traditional IRA, the contributions are not taxed (they are either taken out of a paycheck and set aside in an account prior to tax withholding, or by individual contributions to an account which are deductible from taxable income except at higher taxable income levels), but the amounts are taxed (along with earnings on them, if any) when withdrawn.
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*In a Roth IRA, the contributions are taken from post-tax dollars, but only earnings on the IRA (if any) are taxed upon withdrawal (the remainder of the withdrawal is not taxed).<ref>http://survivalblog.com/guest-post-self-directing-your-retirement-sheltering-the-fruits-of-your-labor-by-will-lehr Accessed December 8, 2014</ref>
  
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IRA's can be individual plans offered by financial firms, or can also be offered by employers.  The most common retirement account offered by employers is a 401k plan (named for the applicable IRS code section), whereby individuals can set aside either a set percentage or set amount each paycheck (limited to maximum amounts by the IRS) which is set aside and is not taxed at the outset, but later withdrawals are taxed.  The employer commonly matches a portion of the amount, but is not required.  Persons age 50 or older can, in some cases, set aside "catch up" contributions (again, limited to IRS maximums) which are not matched.  The amounts can be invested either in company stock or in other types of investments such as mutual funds.  One of the largest 401k type plans is the Thrift Savings Plan (TSP), which is for United States government and military personnel, and offers both traditional and Roth IRA options.
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IRA's can be individual plans offered by financial firms, or can also be offered by employers.  An IRA can either be professionally managed (which is the most common, such as the purchase of a mutual fund) or "self-directed" similar to a traditional savings or stock brokerage account.  Although there are bloggers who make suggestions as to how to manage a self-directed fund, their advice is often questionable, since the Internal Revenue Code and Treasury regulations restrict who can serve as a custodian and what types of assets can be placed in a Roth IRA. A non-bank trustee or custodian must obtain the prior written approval of the IRS before opening Roth IRA or other such accounts, and the IRS publishes a list of approved nonbank trustees or custodians.<ref>{{cite web|url=https://www.irs.gov/Retirement-Plans/Approved-Nonbank-Trustees-and-Custodians|title=Approved Nonbank Trustees and Custodians|accessdate=March 28, 2016}}</ref>
  
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In the educational and non-profit world, a 403b plan works generally the same way, with some minor differences.
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In addition, under Internal Revenue Code Section 408(m), IRAs (whether professionally managed or self-directed) '''cannot''' invest in collectibles (e.g. art, antiques, gems, coins, or alcoholic beverages), and can invest in certain precious metals only if they meet specific requirements.  The most common investments in an IRA are securities (individually or via mutual funds) along with savings accounts and certificates of deposit.  Some IRA's allow investments in real estate as well as life insurance annuities.
  
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==Roth IRA==
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The most common retirement account offered by employers is a 401k plan (named for the applicable IRS code section). In the educational and non-profit world, a 403b plan works generally the same way, with some minor differences.  Under such a plan, individuals can set aside either a set percentage or set amount each paycheck (limited to maximum amounts by the IRS) which (depending on the plan) can be traditional, Roth, or both.  The employer commonly matches a portion of the amount, but is not required.  Persons age 50 or older can, in some cases, set aside "catch up" contributions (again, limited to IRS maximums) which are not matched. The amounts can be invested either in company stock or in other types of investments such as mutual funds. One of the largest employer-sponsored retirement plans is the Thrift Savings Plan (TSP), which is for United States government and military personnel, and offers both traditional and Roth IRA options.
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An Roth individual retirement arrangement (Roth IRA) is a personal savings plan which allows one to [[investment|invest]] or set aside [[money]] for [[retirement]], while offering [[deferred tax]] / [[tax]] advantages.<ref>https://www.irs.gov/taxtopics/tc451.html</ref>
 
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The Roth retirement plan under U.S. [[law]] that is generally not taxed, as long as certain conditions are met. The US tax law allows a reduction in tax on a limited amount of [[saving]] for retirement. Roth IRA's main difference from the majority of tax-advantaged retirement plans is that, instead of granting a [[tax break]] for money placed into the plan, the tax break is granted on the money withdrawn from the plan during retirement.
 
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"A Roth IRA is setup and funded by an individual; however, some employer/group plans can have Roth accounts.  A Roth is unique in that it is funded with after-[[tax]] [[dollar]]s, meaning the individual does not deduct the contribution from that year’s [[income tax]]es.  He or she pays income taxes on the dollars earned and then contributes to the Roth.  The benefit of this account type is that the distributions at retirement age are 100% tax-free. No income tax is claimed from the distribution."<ref>http://survivalblog.com/guest-post-self-directing-your-retirement-sheltering-the-fruits-of-your-labor-by-will-lehr Accessed December 8, 2014</ref>
 
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The Roth IRA is basically a contract between the taxpayer and a custodian (such as a bank, stockbroker or insurance company.) In most cases, the contract is signed as a part of the paperwork in opening the account.  Although some bloggers have advocated creating your own corporation to serve as the custodian or to invest in collectibles, the Internal Revenue Code and Treasury regulations restrict who can serve as a custodian and what types of assets can be placed in a Roth IRA. A non-bank trustee or custodian must obtain the prior written approval of the IRS before opening Roth IRA or other such accounts, and the IRS publishes a list of approved nonbank trustees or custodians.<ref>{{cite web|url=https://www.irs.gov/Retirement-Plans/Approved-Nonbank-Trustees-and-Custodians|title=Approved Nonbank Trustees and Custodians|accessdate=March 28, 2016}}</ref>
 
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Roth IRAs can be contain [[investment]]s in [[securities]], most often [[common stock]]s and [[bond]]s, typically through [[mutual fund]]s. Roth IRAs also, although less commonly, allow other investments including [[real estate]], [[derivative]]s, notes, and [[certificates of deposit]]. Roth IRAs also allow [[annuity|annuities]] bought from a [[life insurance]] company.  In addition, under Internal Revenue Code Section 408(m), both participant-directed accounts and IRAs '''cannot''' invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements.
 
  
 
===Further reading===
 
===Further reading===
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==References==
 
==References==
 
{{reflist}}
 
{{reflist}}
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{{Economic preparedness topics}}
 
  
 
[[Category:Individual Retirement Accounts]]
 
[[Category:Individual Retirement Accounts]]
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[[Category:Retirement]]
 
 
[[Category:Investments]]
 
[[Category:Investments]]
 
[[Category:Finance]]
 
[[Category:Finance]]

Revision as of 22:03, February 24, 2019

An individual retirement account (IRA) is a personal savings plan which allows you to invest or set aside money for retirement, while offering you deferred tax / tax advantages.[1] These are technically known as "defined contribution" plans, since (unlike a traditional pension, or "defined benefit" plan) the only known amount is how much is contributed, there is no guarantee of any specific level of income at withdrawal (and could lose some or even all of its value).

There are two types of IRA's: traditional and Roth.

  • In a traditional IRA, the contributions are not taxed (they are either taken out of a paycheck and set aside in an account prior to tax withholding, or by individual contributions to an account which are deductible from taxable income except at higher taxable income levels), but the amounts are taxed (along with earnings on them, if any) when withdrawn.
  • In a Roth IRA, the contributions are taken from post-tax dollars, but only earnings on the IRA (if any) are taxed upon withdrawal (the remainder of the withdrawal is not taxed).[2]

IRA's can be individual plans offered by financial firms, or can also be offered by employers. An IRA can either be professionally managed (which is the most common, such as the purchase of a mutual fund) or "self-directed" similar to a traditional savings or stock brokerage account. Although there are bloggers who make suggestions as to how to manage a self-directed fund, their advice is often questionable, since the Internal Revenue Code and Treasury regulations restrict who can serve as a custodian and what types of assets can be placed in a Roth IRA. A non-bank trustee or custodian must obtain the prior written approval of the IRS before opening Roth IRA or other such accounts, and the IRS publishes a list of approved nonbank trustees or custodians.[3]

In addition, under Internal Revenue Code Section 408(m), IRAs (whether professionally managed or self-directed) cannot invest in collectibles (e.g. art, antiques, gems, coins, or alcoholic beverages), and can invest in certain precious metals only if they meet specific requirements. The most common investments in an IRA are securities (individually or via mutual funds) along with savings accounts and certificates of deposit. Some IRA's allow investments in real estate as well as life insurance annuities.

The most common retirement account offered by employers is a 401k plan (named for the applicable IRS code section). In the educational and non-profit world, a 403b plan works generally the same way, with some minor differences. Under such a plan, individuals can set aside either a set percentage or set amount each paycheck (limited to maximum amounts by the IRS) which (depending on the plan) can be traditional, Roth, or both. The employer commonly matches a portion of the amount, but is not required. Persons age 50 or older can, in some cases, set aside "catch up" contributions (again, limited to IRS maximums) which are not matched. The amounts can be invested either in company stock or in other types of investments such as mutual funds. One of the largest employer-sponsored retirement plans is the Thrift Savings Plan (TSP), which is for United States government and military personnel, and offers both traditional and Roth IRA options.

Further reading

  • Bledsoe, John D. (1998). Roth to Riches: The Ordinary to Roth IRA handbook. Dallas, TX: Legacy Press. ISBN 0-9629114-1-0. OCLC 40158081. 


  • Daryanani, Gobind (1998). Roth IRA Book: An Investor's Guide: Including a Personal Interview with Senator William V. Roth, Jr. (R-De), Chairman, U.S. Senate Finance Committee. Bernardsville, NJ: Digiqual Inc.. ISBN 0-9665398-1-8. OCLC 40340829. 


  • Merritt, Steve (1998). All about the New IRA, Roth, Traditional, Educational: How to Cash in on the New Tax Law Changes. Melbourne, FL: Halyard Press. ISBN 1-887063-07-2. OCLC 39363078. 


  • Slesnick, Twila (2007). IRAs, 401(k)s, & Other Retirement Plans: Taking Your Money Out, 8th, Berkeley, CA: Nolo. ISBN 978-1-4133-0696-5. OCLC 85162294. 


  • Thomas, Kaye A. (2004). Fairmark Guide to the Roth IRA: Retirement Planning in Plain Language. Lisle, IL: Fairmark Press, Inc.. ISBN 0-9674981-0-4. OCLC 55048948. 


  • Trock, Gary R. (1998). The Roth IRA Made Simple. Grifith, IN: Conquest Pub.. ISBN 0-9666227-0-7. OCLC 40641031. 

See also

External links

References

  1. ↑ https://www.irs.gov/taxtopics/tc451.html
  2. ↑ http://survivalblog.com/guest-post-self-directing-your-retirement-sheltering-the-fruits-of-your-labor-by-will-lehr Accessed December 8, 2014
  3. ↑ Approved Nonbank Trustees and Custodians. Retrieved on March 28, 2016.
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