Individual Retirement Accounts

There are 11 Types of Retirement Accounts

1. An Individual Retirement Account is either a traditional or Roth IRA set up with a financial institution such as a bank, broker, or mutual fund in which contributions may be invested in many different types of securities such as stocks, bonds, money markets, CDs, etc.


2. An Individual Retirement Annuity is either a traditional or Roth IRA set up with a life insurance company through the purchase of a special annuity contract.


3. An Employer and Employee Association Trust Account, or Group IRA, is a traditional IRA set up by employers, unions, and other employee associations for their employees or members.


4. A Simplified Employee Pension (SEP-IRA) is a traditional IRA set up by an employer for a firm's employees. An employer may contribute up to $30,000 or 15% of an employee's compensation annually to each employee's IRA.


5. A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) ) is a traditional IRA set up by a small employer for a firm's employees. In 2005, an employee may contribute up to $10,00 per year to these IRAs. In 2006 and later years, the allowable contribution will increase in $500 increments whenever the cumulative effects of inflation indicate such a rise is needed. The employer sponsoring the SIMPLE will also make a matching contribution based on a percentage of the employee's pay.


6. A Spousal IRA is either a traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has less than the maximum allowable annual contribution limit in annual compensation. The couple must file a joint tax return for the year of contribution. The working spouse may contribute up to the maximum allowable annual contribution limit per year to both the Spousal IRA as well as to his or her own IRA.


7. A Rollover (Conduit) IRA is a traditional IRA set up by an individual to receive a distribution from a qualified retirement plan. Distributions transferred to a rollover IRA are not subject to any contribution limits. Additionally, the distribution may be eligible for transfer into a qualified retirement plan available through a new employer. After January 1, 2002, commingling of conduit IRA money with other IRA or qualified retirement plan money is permitted, and the mixing of such monies will have no impact on the ability to transfer those IRAs to a new employer's retirement plan.


8. An Inherited IRA IRA is either a traditional or a Roth IRA acquired by a beneficiary who is not the spouse of a deceased IRA owner. Special rules apply to an inherited IRA. A tax deduction is not allowed for contributions to this IRA, a rollover to or from another IRA owned by the heir is not permitted, and the proceeds must be distributed and taxed within a specific period as established by the Internal Revenue Code. When the owner dies, the beneficiary must receive distribution of the inherited IRA by December 31 of the fifth year following the owner's death. Alternatively, the IRA may be paid as an annuity or in installments. If the owner dies without naming an IRA beneficiary but before taking minimum required distributions (MRD) at age 70½, then the IRA would have to be paid out to the deceased's estate by December 31 of the fifth year following the year of death. If the owner dies without naming a beneficiary but after MRD's have begun, then the account may be paid to the estate over time, based on the deceased's life expectancy calculated in the year of death. That life expectancy would be reduced by one in each subsequent year to calculate that year's payout.


9. An Education IRA (EIRA), now called the Coverdell Education Savings Account (ESA), is an account established to provide funds that will allow a beneficiary to attend a program of higher education. There is no tax deduction allowed for the contribution, but all deposits and earnings may be withdrawn free of tax and penalties if they are used to pay for the costs of higher education. Beginning in 2002, Coverdell ESA proceeds may also be used free of tax and penalty to pay for the qualified expenses for kindergarten through 12th grade education in public, private, and/or religious schools. Beginning in 2002, allowable contributions increased to $2,000 per year. Contributions may be made regardless of the beneficiary's income, but cannot be made on or after the beneficiary reaches the age of 18. If distributions exceed the education expenses, the earnings must be included in gross income and are subject to the 10% excise tax to the extent of the excess. Contributions begin to phase out at $150K for joint filers and $95K for single filers. The EIRA, if unused on or before age 30, may be transferred to another qualifying family member as the new beneficiary for educational use. Such transfers must occur before the beneficiary reaches age 30.


10. A Traditional IRA is the term for a regular IRA available to those under age 70½ who have earned income. Earnings within the traditional IRA grow tax-deferred until withdrawal. Withdrawals must begin, and will be taxed, when the owner reaches age 70½. If required distributions are not taken at that age, a 50% penalty will be assessed on the amount not taken. When made, contributions may or may not be tax deductible. If a traditional IRA owner participates in an employer's qualified retirement plan on any day in the tax year, the deductibility of contributions declines to zero between certain AGI ranges. A working spouse not covered by a retirement plan through employment may make a tax-deductible contribution to a traditional IRA of up to the applicable annual limit shown in the above table despite the other spouse's coverage under an employer-provided retirement plan. When the couple's AGI reaches $150,000, deductibility for such contributions begins to decline, and it reaches zero at a joint AGI of $160,000.


11. A Roth IRA is one in which:
1. Contributions to the account are not deductible.
2. "Qualified" distributions (i.e., withdrawals) from the account are not taxable; and
3. Earnings on the account are taxable and subject to an early withdrawal penalty only when a withdrawal is not a "qualified" distribution.

A "qualified" distribution from a Roth IRA is a withdrawal that meets one or more of the following:

• Made after the taxpayer attains age 59½.
• Made to a beneficiary after the taxpayer's death.
• Made because the taxpayer is disabled.
• Made by a first-time home buyer to acquire a principal residence.

No withdrawal except those attributable to previously taxed contributions will be a qualified distribution unless it is made after the five-taxable-year period beginning with the tax year in which the taxpayer first contributed to a Roth IRA. Annual contributions to a Roth IRA are subject to contribution limits, as reduced by any contribution made to a traditional IRA. Contributions to a Roth IRA may be made even after the owner reaches age 70½. The annual contribution limit is phased out as AGI increases from $150,000 to $160,000 (married filing jointly) or $95,000 to $110,000 (single filer).

Amounts in a traditional IRA may be transferred to a Roth IRA if the taxpayer's AGI (married or single) for the transfer year is $100,000 or less. Transferred amounts must be included in that year's income, but the money transferred will be exempt from the 10% excise tax for a withdrawal prior to age 59½. No withdrawal allocable to earnings on the transferred amounts is considered to be a qualified distribution unless it is made more than five tax years after the transfer.

An Individual Retirement Account should be part of any complete retirement plan, and there are several different IRAs depending on your individual circumstances. Obviously some plans are better than others when it comes to building wealth and saving for retirement. Please visit our home page to learn more about retirement planning.

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