The Types Of Individual Retirement Accounts (IRA)

An Individual Retirement Arrangement (IRA) account is a type of retirement account anyone can set up, as long as they have earned income. In this article, I will be introducing the types of IRA accounts and what they mean to you. Everyone should have an IRA account. An IRA plays an important part of your retirement and estate planning. Since there is a lot to this topic, I will defer discussion about various strategies to a later time.

The Types Of IRA Accounts

Traditional  – Anyone can contribute to a Traditional IRA. Depending on how much money you make, the contribution can be tax deductible. The money you put in a Traditional IRA grows tax-deferred. You can start withdrawing funds at 59 ½. You must start withdrawing a minimum amount by 70 ½. The distributions from a Traditional IRA are taxable as ordinary income.

Roth – A Roth IRA is similar to a Traditional IRA in the way it functions. Not everyone can contribute to a Roth IRA, but if you qualify, the contribution limits are the same. The money you invest in a Roth IRA is after tax, so contributions are not tax deductible. The money grows tax-free. Withdrawals are tax-free as well.

Since contributions come from after tax money, you can withdraw the contributions at any time, free of tax. It is optional start withdrawals at 59 ½. There is no mandatory minimum distribution age. A certain amount of money can be withdrawn without penalty for certain life events.

Rollover – Rollover IRA’s are typically used to transfer employer sponsored retirement accounts (e.g. 401(k)) to an individually owned retirement account when leaving a company. This type of account is good for consolidating retirement plans, especially if you have several 401(k)’s from old employers. They can be in Traditional or Roth forms.

Generally, if you have a Traditional 401(k), you would rollover into a Traditional Rollover IRA. If you have a Roth 401(k), you would rollover into a Roth Rollover IRA. If you switch types during the rollover, you may pay income taxes on the conversion.

Inherited – Inherited IRA’s are specifically for beneficiaries of the person who originally owned the IRA. Based on your relationship with the deceased IRA owner, there are many options on how to handle Inherited IRA’s.

• If you are the spouse of the decedent:
  • You can rollover the IRA into your own.
  • You can take distributions from the assets of the Inherited IRA.
  • You can disclaim your inheritance and pass it to the next beneficiary.
• If you are a person other than the spouse:
  • You can take distributions from the assets of the Inherited IRA.
  • You can take a lump-sum cash distribution.
  • You can disclaim your inheritance and pass it to the next beneficiary.
  • You may be eligible to keep the assets in an Inherited IRA and let the money grow.
•   You can name a charitable organization, an estate, or a trust as the beneficiary.

The money you save in an IRA account can be invested in several ways:

• Brokerage IRA – This is the most flexible type of IRA account. A brokerage IRA will allow you to invest in stocks, mutual funds, bonds, and CD’s among other investments. You cannot trade on margin (borrowed money) with a brokerage IRA account.
• Mutual Funds – You can set up an IRA for a single mutual fund or a mutual fund family, like Vanguard or Oakmark. IRA accounts can be split up, so you can choose to start multiple IRA’s for your favorite funds at different companies.
• Certificates of Deposit (CD) – CD IRA accounts are exclusively held at banks. These are the least risky types of investments because they are more like savings accounts.
• Annuities – Annuities are usually sold by insurance companies. Immediate annuities pay you a set amount of income per month after you pay the insurance company a large lump sum of money. Deferred annuities allow you to accumulate savings over time and are paid out in monthly disbursements, or a lump sum.
• Professionally Managed – This method if only recommended if you have an unusually large IRA account, have all of your investments professionally managed, or have a complicated investment structure. Investing with a manager will give you the most flexibility and access to professional advice, but will cost you the most.

Investing For Beginners

1. An Introduction To Investing
2. An Overview Of The Different Types Of Investments
3. The Types Of Employer Sponsored Retirement Accounts
4. The Types Of Individual Retirement Accounts
5. Retirement Accounts For The Self-Employed
6. Education Investment Accounts & College Savings Plans
7. Regular Taxable Investment Accounts
8. Other Investment Accounts