Individual Retirement Arrangements, or IRAs, provide tax incentives for people to make investments that can provide financial security for their retirement. These accounts can be set up with a bank or other financial institution, a life insurance company, mutual fund or stockbroker.
Here’s basic overview to help people better understand this type of retirement savings account.
Contribution.The money that someone puts into their IRA. There are annuallimits to contributionsdepending on their age and the type of IRA. Generally, a taxpayer or their spouse must have earned income to contribute to an IRA.
Distribution. The amount that someone withdraws from their IRA.
Withdraws.Taxpayers may face a 10% penalty and a tax bill if they withdraw money before age 59 ½, unless theyqualify for an exception.
Required distribution. There are requirements for withdrawing from an IRA:
Roth IRAs do not require withdrawals until after the death of the owner.
Savings Incentive Match Plan for Employees. This is commonly known as aSIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
Simplified Employee Pension. This is known as aSEP-IRA. An employer can make contributions toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.