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In 1974, Congress enacted the Employee Retirement Income Security Act giving individuals the right to save for their own retirement by contributing to an Individual Retirement Account, or IRA. Since then, Congress has made many changes to the IRA, both expanding their usefulness and adding certain restrictions. Today, almost everyone can have an IRA, whether it is established through new contributions, a rollover from an employer-sponsored retirement plan, inherited from a loved one, or provided by an employer. Select a tab below to learn more about each type of IRA. Contributory IRA A contributory IRA is one that you contribute to out of earnings. The maximum annual contribution in 2007 is $4,000; in 2008 it is $5,000. Individuals over 50 may make an additional catch-up contribution of $1,000. Anyone with earned income may contribute to an IRA. If you are not covered by a retirement plan at work, you may take a tax deduction for your contribution. If you are covered by a retirement plan at work, your tax deduction will depend on your income. These threshold amounts change every year and can be complicated for married couples, especially when one spouse is covered by a retirement plan at work and the other is not. Check with your tax advisor to see if your IRA contribution is tax deductible. Rollover IRA A rollover IRA is established by transferring assets from an employer-sponsored plan or another IRA into a new IRA. There are two ways to move assets into a rollover IRA. One is to have the assets transferred directly from the institution holding the retirement plan or IRA to the new institution where you want to maintain your rollover IRA. The other is to take receipt of the funds and deposit them into the new IRA within 60 days. Once a rollover IRA has been established, the assets grow tax deferred and may be managed according to your objectives (see Investing Your IRA). Roth IRA A Roth IRA is a special type of IRA funded with after-tax dollars. The distinguishing feature of a Roth is that distributions are tax free, and the rules are entirely different than for traditional IRAs. There are two ways to get money into a Roth IRA. One is to open a Roth IRA (subject to certain income thresholds which are adjusted annually for inflation) and make annual after-tax contributions to the account. The other way is to convert a traditional IRA to a Roth. This means you must pay income taxes at the time of the conversion, but then all the money in the Roth -- including all future investment earnings -- is never taxed again. To do a Roth conversion your income must be less than $100,000 (not counting the amount converted) in the year you do the conversion Most of the information on this site relates to traditional IRAs, not Roth IRAs. Please contact us if you would like information on Roth IRAs. Inherited IRA An inherited IRA is its own separate animal. When an IRA owner dies and the IRA goes to the beneficiary, it loses some of the characteristics of a traditional IRA and becomes an inherited IRA, subject to its own rules. The rules are vastly different for spouses versus nonspouses. If a spouse takes the inherited IRA as her own (nonspouses can't do this), then it is no longer an inherited IRA but rather a rollover IRA which may also receive annual contributions. If a nonspouse inherits an IRA, it remains an inherited IRA. No further contributions may be made to it (although the beneficiary may certainly open his or her own IRA and fund it with annual contributions). Workplace IRA Some employers incorporate SEP and SIMPLE IRAs into their retirement plan benefits for employees. If your employer offers one of these plans, you can obtain specific information from the employer. If you are a small business owner who is considering adopting a SEP-IRA or other retirement plan for yourself and your employees, please contact us for more information. |
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Types of IRA Plans