Individual retirement account
An individual retirement account or IRA is a form of "individual retirement plan".[1] It is simply a savings account with large tax advantages.[1] An IRA is not itself an investment. It is where an investor keeps assets such as stocks, bonds and mutual funds.[2] A 401(k) is set up by an employer,[2] but an IRA may be started by an individual. Other IRAs may be opened by small business owners and those who are self-employed.[2]
Types of IRAs
There are different types of IRAs: Traditional IRAs, Roth IRAs, SEP-IRAs and SIMPLE IRAs.[3] They vary as to tax filing status. Also they have different rules and conditions.
- Traditional IRA - Contributions to a traditional IRA are, depending on income, tax status and whether the taxpayer has a retirement plan sponsored by his or her employer.[3] In 2023, a taxpayer can contribute $6,500 to a traditional or Roth IRA.[4] If over age 50, the catch-up contribution limit is an additional $1,000.[4] Either amount can be reduced if the taxable compensation (wages for example) are less than limit set for the IRA contribution.[4]
- Roth IRA - contributions to Roth IRAs are not tax deductible.[3] The amount that can be contributed is usually the same as a Traditional IRA.
- SEP-IRA - Businesses of any size who want to set up an IRA for employees can use the SEP (Simplified Employee Pension Plan) IRA .[5]
- SIMPLE IRA - A SIMPLE (Savings Incentive Match PLan for Employees) IRA is for employees and employers to set up an IRA. This is for small businesses that do not have a retirement plan.[6]
Prohibited asset types
Internal Revenue Code Section 408 prohibits IRA investments in life insurance and in collectibles [7] such as artwork, rugs, antiques, metals (there are exceptions for certain kinds of bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible personal property.
Participant-directed accounts
A participant-directed account (also called a self-directed IRA) is an IRA which is provided by some financial institutions in the United States.[8] It allows alternative investments for retirement savings. Some examples of such alternative investments are: real estate, private mortgages, private company stock, oil and gas limited partnerships, precious metals, horses, and intellectual property. There is a risk of fraud when investing in Self-Directed retirement accounts.[8]
References
- ↑ 1.0 1.1 "What is an IRA?". CNN. Retrieved 10 December 2015.
- ↑ 2.0 2.1 2.2 "What is an IRA?". CNN Money. Retrieved 10 December 2015.
- ↑ 3.0 3.1 3.2 "Individual Retirement Account - IRA". Investopedia, LLC. Retrieved 10 December 2015.
- ↑ 4.0 4.1 4.2 IRS (October 21, 2022). "How to reduce your taxes: Contribute to an IRA". IRS.gov. Internal Revenue Service. Retrieved 12 May 2023.
- ↑ "Simplified Employee Pension Plan (SEP)". IRS. Archived from the original on 26 January 2016. Retrieved 10 December 2015.
- ↑ "SIMPLE IRA Plan". IRS. Retrieved 10 December 2015.
- ↑ Bergman, Adam. "Choosing The Right Self-Directed IRA Depends On What You Want To Own". Forbes. Retrieved 2021-01-14.
- ↑ 8.0 8.1 "Investor alert: self-directed IRAs and the risk of fraud" (PDF). US Securities and Exchange Commission (SEC). Retrieved 10 December 2015.