An individual retirement account (IRA) is established at a financial institution to allow you to save for retirement. IRAs allow for the tax-free accumulation of money or can be set up as tax-deferred accounts. Financial experts estimate a person should save about 85% of their income for retirement. Since 401K plans by themselves are usually not enough to reach this percentage, combining an IRA with a 401K is strongly recommended to avoid financial instability during your retirement years.
Traditional IRAs or Roth IRAs are set up in banks or other financial institutions like brokerages or mutual funds. Contributions to IRAs are then invested in bonds, stocks, CDs, or money markets. Roth IRAs are special retirement accounts funded by a person's post-tax income. This means you cannot deduct contributions to a Roth IRA on state and federal income taxes. Any future withdrawals following Roth IRA guidelines are considered tax-free.
SEPs are traditional IRAs established by employers for their employees. Employers can contribute as much as $30,000 (15 percent) of an employee's wages each year to individual employee IRAs. Money placed in SEP-IRAs by employers are not part of income. In addition, an employee's contribution is deductible from their income taxes. Investments within simplified employee pension plans are tax-deferred as well. You are not limited in what kind of investments you want to make with an SEP-IRA, unlike 401K plans. In most cases, financial institutions offer all types of investments in contrast to the restricted investments allowed by most 401K plans.
Individual retirement annuities are either Roth IRAs or traditional IRAs set up with life insurance companies by purchasing special annuity contracts. An IRA has the same tax advantages, contribution limits, and other provisions as an individual retirement annuity. However, individual retirement annuities can be used to provide income during retirement or may be invested in variable annuities or fixed annuities. Specific requirements include fully vesting your annuity interest in the annuity and not transferring any balance to other individuals (although you could name a beneficiary).
A group IRA is an Employer and Employee Association Trust Account established by unions, employee associations, or employers. As soon as a group IRA is opened, members can begin making contributions. All contributions must be in the form of a money order, check or cash. Property cannot be contributed to a group IRA. However, your group IRA might invest in property by purchasing stock shares. Additionally, you could decide to "roll-over" or transfer certain property from a group IRA to another retirement plan, depending on your IRA's provisions.
A traditional IRA created by small employers for their employees, Savings Incentive Match Plan for Employees (SIMPLE) allows employees to contribute over $6,000 annually, with permitted increases expected to match inflation rates as they develop. Employers sponsoring SIMPLEs also make matching contributions based on percentages of each employee's pay. SIMPLEs are recommended as start-up retirement savings plans for employers with fewer than 100 employees who are not already sponsoring a specific retirement plan.
Spousal IRAs are either traditional IRAs or Roth IRAs funded by married taxpayers in the name of a spouse who has $2000 or less in yearly compensation. Couples with a spousal IRA must file joint tax returns for the year of a contribution. Working spouses can contribute $2000 or less per year to their spouse's IRA and no more than $2000 to their own IRA. In summary, couples can contribute $4000 maximum annually as long as each IRA does not receive over $2000.
Rollover (Conduit) IRAs are traditional IRAs established by one individual for the purpose of receiving distributions from qualified retirement plans. There are no contribution limits on contributions transferred to rollover IRAs. In addition, distributions are generally eligible for future transfers into qualified retirement plans available through new employers. Eligible distributions may be transferred into a rollover IRA without tax penalties, while all assets remain as tax-deferred investments. Consolidating several employer-sponsored retirement plans into one rollover IRA makes it easier to distribute and watch retirement assets.
Education IRAs provide money to beneficiaries who plan on attending a college or university. No tax deductions are permitted for education IRAs, but all earnings and deposits can be taken out free of penalties as long as the money is used to pay for higher education costs. Be aware that tax laws prohibit funding education IRAs once a beneficiary is 18 years old. In some cases, lower than average contribution limits could mean you will be charged a maintenance fee by the financial institution holding this type of IRA. Education IRAs must be liquidated by the beneficiary's 30th birthday, or it will be subjected to penalties and tax.
An inherited IRA can be a Roth IRA or a traditional IRA that is acquired by the beneficiary (familial or non-familial) of an IRA owner who has passed away. Certain rules apply to inherited IRAs, for instance, tax deductions cannot be taken for contributions to this type of IRA. Also, any distributed proceeds must be taxed within designated periods established by the IRS.
Profit-sharing IRA plans accept discretionary (no set amount) contributions from employers. A standardized formula is needed for employers to make contributions to each employee's account, which determines how contributions are divided. Employers offering profit-sharing IRAs are not restricted to just this type of IRA. Also, businesses of any size can establish profit-sharing IRAs. Employees enrolled in a profit-sharing plan can transfer funds to a traditional IRA if they become unemployed or retire from that company.