- An Individual Retirement Account is either a traditional or Roth IRA set up with a financial institution like a bank, broker, or mutual fund in which contributions may be invested in many types of securities such as stocks, bonds, money market, and CDs.
- 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.
- An Employer and
Employee Association Trust Account,
or group IRA, is a traditional IRA set up by
employers, unions, and other employee associations
for employees or members.
- 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.
- 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 2001, an employee may
contribute up to $6,500 per year to these IRAs. This
contribution limit will increase each year through
2005, when it will reach $10,000. 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. In 2001, the combined
employer-employee contribution to the participant's
account cannot exceed $13,000.
- 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 $2,000 in annual compensation. The
couple must file a joint tax return
in the year of the
contribution. The working spouse may contribute up
to $2,000 per year to the Spousal IRA and up to
$2,000 per year to his or her own IRA. A couple,
then, may contribute up to $4,000 per year provided
neither IRA receives more than $2,000.
- 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 subsequent transfer into a
qualified retirement plan available through a new
employer. To retain this eligibility through Dec.
31, 2001, the IRA must be composed solely of the
original distribution and earnings (i.e., no other
contributions or rollovers may be added to or
mingled with the IRA), and the new employer's plan
must allow the rollover. After Jan. 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.
- An Inherited IRA
is either a traditional or a Roth IRA
acquired by the non-spousal beneficiary 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.
- An Education IRA (EIRA)
is an IRA 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 used
to pay for the costs of higher education. Beginning
in 2002, EIRA proceeds may also be used free of tax
and penalty to pay for the qualified expenses of a
kindergarten through 12th grade education in public,
private, and/or religious schools. EIRA
contributions are limited to a maximum of $500 per
year, but that's in addition to the $2K limit on any
other IRA. Beginning in 2002, allowable EIRA
contributions increase to $2,000 per year.
- A Traditional IRA
is the term for a regular IRA available to those
under age 70 1/2 who have earned income (i.e., job
compensation). Earnings within the traditional IRA
grow tax-deferred until withdrawal. Withdrawals must
begin, and will be taxed, when the owner reaches age
70 1/2. 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 depending on certain
factors. A working spouse not covered by a
retirement plan through employment may make a
tax-deductible contribution of up to $2,000 annually
to an IRA 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.
- A Roth IRA is an IRA in which:
- Contributions to the account are not deductible.
- "Qualified" distributions (i.e., withdrawals) from the account are not taxable.
- 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 59 1/2
- Made to a beneficiary after the taxpayer's death
- Made because the taxpayer is disabled
- Made by a first-time homebuyer 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-tax-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 the 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 70 1/2. 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 traditional IRAs may be transferred to Roth IRAs provided 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 59 1/2. 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.
Further details on IRA provisions may be found in IRS Publication 590, Individual Retirement Arrangements. This publication may be obtained at no cost by calling 1-800-TAX-FORM or downloading it online
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