Individual Retirement Arrangements, better known as IRAs, are accounts into which someone can deposit money to provide financial security when they retire.
What Are the Different Types of IRAs?
There are different types of IRAs and a list and their attributes are listed as follows:
- Traditional IRA – Contributions to a traditional IRA may be tax deductible. The amounts in a traditional IRA are not generally taxed until you take them out of the account.
- Savings Incentive Match Plan for Employees: Commonly known as a Simple IRA. It allows employees and employers to contribute to traditional IRAs set up for employees. It is ideal as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
- Simplified Employee Pension: This one is better known simply as a SEP-IRA. It is a written plan that allows an employer to make contributions toward their own retirement and their employees’ retirement without getting involved in a more complex qualified plan. An SEP is owned and controlled by the employee.
- ROTH IRA: An IRA that is subject to the same rules as a traditional IRA, but with certain exceptions. One exception is a taxpayer cannot deduct contributions to a Roth IRA. One great advantage to the ROTH is if the IRA owner satisfies certain requirements, qualified distributions are tax-free upon retirement age. Another advantage is you can make distribution regardless of your age and there is no mandatory requirement to take a withdrawal or distribution at any certain age.
How Can I Set Up an IRA?
A taxpayer can set up an IRA in several ways and some of the most common is with a/an:
- Bank or other Financial Institution;
- Life insurance company;
- Mutual Fund
Important Notes About IRAs
Another item to note about IRAs is there are limits to the amounts you can contribute into your IRA annually. These limits are based on your age and the type of IRA you have.
If you take a withdrawal or distribution as discussed above before retirement age a penalty may be assessed on top of the tax consequence.
Once you reach retirement age you can start taking withdrawals and with traditional IRAs, it is mandatory that you start taking distributions at age 70 ½.
Let Us Help You Retire Successfully
Saving for retirement is essential for a healthy and stress-free retirement. If your budget does not allow you to contribute to a retirement account and/or you are struggling to pay your bills each month, contact us to discuss your options for dealing with your other debts via Bankruptcy.
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Grant McNutt is a Managing Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Science from the University of Alabama, and a Juris Doctorate from the Birmingham School of Law. He has been practicing Consumer Bankruptcy Law since 1999. Read his full bio here.