Individual Retirement Account
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An Individual Retirement Account or IRA is a retirement plan account that provides some tax advantages for saving for retirement in the United States. There are a number of different types of IRAs, some being employer provided plans and others usually only being set up by an individual. The types include:
- Roth IRA - money is taxed before deposit, and then accumulates tax free on the earnings, and can be withdrawn tax free. Named for William Roth
- Traditional IRA - money is deposited before tax, money accumulates tax free on earnings until withdrawn at retirement, at which point the money is taxed.
- Rollover IRA - no real difference in tax treatment from a traditional IRA, but the funds come from another type of retirement plan and are "rolled over" into the rollover IRA instead of contributed as cash.
- Conduit IRA - Tool to transfer qualified investments from one account to another. In order to retain certain special tax treatments, funds may not be comingled with other types of assets, including other IRAs.
- SEP IRA - for self-employed individuals.
- SIMPLE IRA - A simplified employee pension plan similar to a 401(k) but with lower contribution limits and simpler administration.
Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts made some further relaxations of restrictions. Essentially most retirement plans can be rolled into IRAs after meeting certain criteria, and most retirement plans can accept funds from an IRA.
IRAs can be funded with most types of securities, and some non security financial instruments. There are a few things that cannot be funded into an IRA. They include collectibles including valuable coins or bullion and life insurance. IRAs cannot generally hold real estate unless it is held as a form of security such as a real estate investment trust, or REIT.
The United States Supreme Court ruled on April 4, 2005 that IRAs are not subject to seizure during bankruptcy. [1] (http://www.supremecourtus.gov/opinions/04pdf/03-1407.pdf) They ruled that because rights to withdrawals are based on age, that IRA's should receive the same protection as other retirement plans. 34 states already had similar laws, but the Supreme court decision allows federal protection for IRA's. [2] (http://www.mercurynews.com/mld/mercurynews/business/11314084.htm)
Correct name
The umbrella term for the concept is legally Individual Retirement Arrangement instead of account. The IRA can then either be an annuity (typically deferred) or have a trust set up that meets specific criteria the Internal Revenue Service has defined. This trust and funding by financial instruments makes it an account, and thus the term "Individual Retirement Account", the most common name IRA's are known by. Even most professionals in the financial industry believe the common term is the correct one.
References
- (April 5, 2005). Court shields IRAs from bankruptcy seizure (http://seattletimes.nwsource.com/html/nationworld/2002231039_scotus05.html). The Seattle Times