Individual Retirement Arrangement
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Individual Retirement Arrangement
Understanding Individual Retirement Accounts
An Individual Retirement Account (IRA) offers a strategic way to plan for retirement with certain tax benefits. Legally called an Individual Retirement Arrangement, an IRA can include deferred annuities or a trust arrangement meeting specific IRS criteria. These financial structures qualify it as an account, making "Individual Retirement Account" the commonly used name, even among financial experts.
Types of IRAs
Several types of IRAs exist, each with unique features:
- Roth IRA: Established by William Roth, this account involves after-tax contributions. Earnings grow tax-free, and withdrawals in retirement are also tax-free.
- Traditional IRA: Contributions can be tax-deductible, with taxes applied upon withdrawal during retirement. Earnings grow tax-free until that point.
- Rollover IRA: Similar to a traditional IRA but funded by transferring assets from another retirement plan, rather than receiving cash.
- Conduit IRA: Facilitates the transfer of funds from one account to another, maintaining specific tax treatments by keeping assets separate from other IRA holdings.
- SEP IRA: Designed for the self-employed, this option offers a simplified plan with tax advantages.
- SIMPLE IRA: A straightforward retirement plan for employees, akin to a 401(k), but with easier administration and lower contribution limits.
Legislative Protections and Limitations
The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) eased restrictions on fund transfers into IRAs, allowing more retirement plans to accept and roll over IRA funds after meeting certain criteria. Additionally, the U.S. Supreme Court has ruled that IRAs are protected from seizure during bankruptcy, offering the same legal protections as other retirement plans.
It's important to note that some items cannot be financed into an IRA, such as collectibles, bullion, valuable coins, or life insurance. Generally, IRAs also do not support direct real estate investments unless they involve a security like a Real Estate Investment Trust (REIT).
Understanding these aspects of IRAs can assist individuals in making informed decisions about their retirement planning, ensuring their assets grow under favorable tax conditions.
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