Individual Retirement Accounts IRAs

There are eight type of Individual Retirement Accounts IRAs namely SEP-IRAs, SIMPLE-IRAs, Traditional IRAs, Rollover IRAs, Spousal IRA, Nondeductible IRAs. IRAs, individual retirement accounts, are a personal retirement savings tool available to everyone who has earned income.

All have a family resemblance, and all are unique in their own way. IRAs, individual retirement accounts, are a personal retirement savings tool available to everyone who has earned income. The maximum annual contribution is limited to $2,000 for all IRAs. All IRAs allow for tax-deferred growth of your assets. Rollover IRAs are unique in that you don't contribute to them directly; you roll (transfer) your retirement savings from an employer retirement plan into a rollover IRA when you change jobs or retire. IRAs may be supplemental to your employer-sponsored plans, or they may be all you have going for you in the way of retirement savings.

IRAs will become very important to you as your plan for your retirement. A self-directed IRA will probably be the tool you will use to manage your qualified retirement money in retirement because most of you will roll the proceeds form your 401(k) plan into an IRA. As a retiree, your former employer will probably not want you hanging around and will boot you out of the 401(k) plan at a certain age.

Congress set up these plans to encourage retirement savings, so once the money is in the IRA, it is going to be difficult and costly to get it out before the retirement age of 59 1/2. You will be assessed a 10 percent penalty if you take the money out before age 59 1/2 unless you either meet some hardship rules, become disabled, die, or start systematic withdrawals (72t rule). Withdrawals form these IRAs must start by April 1 of the calendar year in which you attain age 70 1/2. The IRS is pretty strict about you starting to take mandatory withdrawals; the penalty for not making a timely withdrawal is 50 percent of the missed withdrawal. Uncle Sam has his hand out and is looking for those tax dollars. Remember that you were allowed to contribute the money with pretax dollars, so the IRS does not want that money to sit around forever, compounding tax deferred.

Congress has made it a bit easier to get at the money in your IRAs before reaching age 59 1/2 under certain circumstances. Let me gently remind you, however, why you put this money away in an IRA the first place. It was for your retirement and to enjoy the benefit of tax-deferred compounding. Unlike borrowing from your 401(k) plan, you cannot repay the money once you remove it from the IRA. You will not owe the 10 percent penalty when you withdraw the money, but you will owe income taxes on it.

If you become disabled, have very large medical expenses, or are unemployed and you can use the IRA distribution to pay premiums for health insurance, you are eligible to withdraw the funds in your IRA.

The medical and dental expenses must be in excess of the 7.5 percent floor for your deduction medical expenses. The health insurance premium exception is allowed only if the employee has received at least 12 weeks of unemployment compensation. Complicated stuff!

An IRA can be used to pay for post-secondary education expenses for the taxpayer, taxpayer's spouse, children, or grandchildren. There is also a first-time homebuyer withdrawal allowed with a lifetime limit of $10,000 to build or buy a "first" home that will be the principal residence of the individual, his or her spouse, or any child, grandchild, or ancestor of the individual or spouse.