IRAs are a form of retirement fund that allow US citizens to lower their tax owed. IRAs can either be offered by employers or created by individuals. Since funds are contributed directly to IRAs, most are tax free under US tax law.

Types of IRAs

Different types of IRAs work in different ways. Traditional IRAs have no real distinguishing characteristics. Roth IRAs are perhaps the most different in intent, as the funds are taxed before contribution, allowing tax free withdrawals later in life.

Other types of IRAs include SEP IRAs, which are generally used by small businesses or self-employed individuals, SIMPLE IRAs, which are similar to simplified 401k plans with low contribution limits and simple administration, and Self-Directed IRAs, which are managed by the holder, rather than a designated custodian.

Though there were once several other types of IRAs, these forms are now obsolete. These eliminated forms include Rollover, conduit, and Educational IRAs.

Despite their differences, the tax treatments required for IRAs are very similar. The only major difference is for Roth IRAs, which are taxed at withdrawal instead of deposit.

Contributions

Money is the only type of asset allowed for contribution to IRAs. The current limit on deposit is $5000 a year, with an additional $1000 allowed for anyone over age 50. Whatever the age, no one can deposit more than their yearly income.

Money can almost always be transferred between IRAs and other retirement funds. There are a few exceptions, but in general IRAs and other retirement accounts can accept funds from one another freely.

Getting the Money Out

One of the major drawbacks to IRAs is that there are penalties levied on funds withdrawn before retirement age. In this case, 59.5 is considered the earliest age an individual can withdraw without penalties. There are some exceptions, however, such as allowances for educational expenses or a sum allowed for withdrawal when an individual buys their first home.

IRAs also require the holder to withdraw funds at a certain point, or the funds that should have been withdrawn will begin to be lost. When a holder reaches the age of 70 and 1/2, they must begin withdrawals.

Direction

With the exception of Self-Directed IRAs, IRAs are generally managed by designated managers. IRAs are usually composed of securities. Some other assets are often allowed, but many managers discourage their inclusion.