Individual Retirement Accounts (IRAs)
Everything You Need To Know About IRAs
Frequently Asked Questions
What are individual retirement accounts (IRAs)?
Individual retirement accounts (IRAs) are retirement savings accounts that individuals who are employed can use to save and invest more money for their future. Different types of IRAs offer different tax advantages. Money in an IRA is invested which allows it to potentially grow in value over time.
When did individual retirement accounts begin?
Individual retirement accounts (IRAs) were first introduced in 1974 via the Employee Retirement Income Security Act (ERISA). They were at first only offered to workers who did not have a pension, but in 1981, the government made them eligible for all workers and spouses.
What are the different types of individual retirement accounts?
There are several different types of individual retirement accounts (IRAs), including traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and rollover IRAs. All have different tax advantages that benefit different people based on their work situation.
Who is eligible for an individual retirement account?
You’re eligible for an individual retirement account (IRA) if you have what the IRS determines as “earned income”—wages, salary, tips, commissions, self-employment income, or non-taxable combat pay. If you do not have earned income, but are married to someone who does, you may be eligible for an IRA. Even if you have an employer-sponsored retirement account, you can have an IRA.
How are IRAs taxed?
Money in a traditional IRA is not taxed until you withdraw it in retirement. At that time, the amount you pay in taxes depends on your adjusted gross income and any tax deductions you claim when filing your tax return. Money you contribute to a Roth IRA is made with after-tax dollars, so you do not pay taxes on distributions or withdrawals in retirement.
How many IRAs can you have?
You can have multiple IRAs—there is no limit. You can have more than one traditional or Roth IRA, or a mix of both. However, the contribution limit for the year applies to all of your IRAs, not each one individually. So if you have two IRAs, you can still only contribute up to the maximum amount for that tax year.
How do inherited IRAs work?
If you inherit an IRA from your spouse, you can become the account owner of the IRA, roll it over into another IRA you own, or act as a beneficiary and make a plan to take distributions. If you inherit an IRA from someone else, you will have to make a plan to take distributions. Inherited Roth IRAs generally need to be distributed. They can be treated as your own only if you’re the spouse of the deceased.
How do you open an IRA?
You can open an IRA at any time. Banks and brokerage firms often offer IRAs, so look around to find an institution you trust. You can open a new IRA with money that you rollover from an existing retirement account, or you can start it with money that you transfer from your checking or savings account. When choosing an IRA, consider minimum balance requirements, account costs or fees, and more.
A Roth IRA is a double-tax-advantaged retirement savings account that offers tax-free earnings growth and tax-free distributions. Given these tax perks, opening a Roth IRA is a smart way to invest and grow your money, so that you may become financially independent by the time you retire.
A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is an employer-sponsored retirement plan offered within small businesses that have 100 or fewer employees.
The Substantially Equal Periodic Payment rule allows you to take money out of an IRA before the age of 59 1/2. It also lets you avoid the 10% penalty tax. This approach is also called 72(t) payments because the rule falls under IRS code section 72(t). These payments are also called SEPP payments.
To contribute to an Individual Retirement Account (IRA), you need to have earned income. If you have a spouse that doesn't work, they can also open and contribute to an IRA since you have earned income. This is known as a "spousal IRA," and it's a great way for couples to save for the future.
A Roth conversion is an optional decision to change part or all of an existing tax-deferred retirement plan, such as a 401(k) or a traditional IRA, to a Roth IRA. Converting makes sense if you believe that the benefit from your money growing tax-free will be greater than the immediate cost of paying the taxes due at the time of the conversion.
IRA stands for "individual retirement account." Tax law provides for many types of IRAs, each designed to help you save for retirement, and taxed in its own way. IRAs differ from employer-sponsored accounts in that you can invest on your own terms in many cases, instead of having to choose between a few select funds, as you would with a 401(k).
An IRA rollover is when you transfer or “roll over" money from a previous employer's retirement plan. A rollover IRA is subject to the same terms as other retirement accounts (for instance, with certain exceptions, you can’t make a withdrawal before the age of 59 ½ without paying a penalty), but in other ways, it is far more flexible.
A SEP IRA (Simplified Employee Pension) allows employers to make retirement plan contributions for their employees. In addition, self-employed individuals may create and fund an SEP IRA retirement plan for themselves.
Early Distribution Penalty
An IRA early distribution or withdrawal penalty is when you take money out of your IRA before you reach age 59 ½.
Required Minimum Distributions (RMDs)
The IRS requires that you begin taking withdrawals from your qualified retirement accounts when you reach age 72. These withdrawals are referred to as required minimum distributions (RMDs). Accounts affected by this rule include traditional IRAs, 401(k)s, 457 plans, and other tax-deferred retirement savings plans like TSPs, 403(b)s, TSAs, SEP IRAs, and SIMPLE IRAs.
Modified Adjusted Gross Income (MAGI)
Your modified adjusted gross income (MAGI) determines whether you are allowed to claim certain benefits on your taxes. These include whether you can deduct contributions to an individual retirement account (IRA). It also impacts what you can put in a Roth IRA each tax year.