Introduction To An IRA

Many people have no clear understanding of the meaning or attributes of this financial tool. The acronym IRA stands for an individual retirement account. It has two major benefits that allow for compound interest and tax savings. Your IRA will be the key instrument to enable a long and enjoyable retirement. So, for those with money to place into an IRA and forget about it, there is no reason not to take advantage by doing this. However, understanding the different types of IRAs and what you can do with them can leave many in a state of confusion. So, the following introduction will get you on the path to learning all about IRAs and their benefits.

Anyone who receives taxable compensation during the year can open an IRA account. Yet, both a husband and wife can have their own individual IRA account even if only one person works in the marriage. You should take note that there are limits to how much you can contribute each year into an IRA. Taxes on an IRA do not apply until the money is withdrawn. With a Roth IRA withdrawals may avoid taxation. However, you never deduct contributions to a Roth IRA on your taxes. If certain requirements are met, you may be able to deduct contributions to a traditional IRA.

An IRA has the benefit that money can be taken out from it at any time. However, traditional income tax rates apply if you are taking money from a traditional IRA. Taking money out of an IRA account before you reach the age of fifty-nine and a half will subject you to a ten percent excise tax on top of the income tax. There are several exceptions that allow you to take money out of an IRA before you reach the age of fifty-nine and a half without needing to pay the ten percent penalty. These exceptions include disability, death, education, first time home purchase, medical expenses, and to pay back taxes. They all still require that the IRA be taxed at traditional income rates, with the exclusion of a Roth IRA or an Education IRA.

The Various Types Of IRAs

There are nine different types of IRAs that you can use to plan for a financially stable retirement. The likelihood that all or most of them are needed is slim. But understanding how each of them benefit you can make a huge different in your retirement planning.

The Individual Retirement Account

This traditional or Roth IRA is set up with a financial institution. This money allow for investing in different securities like stocks, bonds, metals, money market and CDs.

The Individual Retirement Annuity

This is almost the same as an Individual Retirement Account. However, it is set up with a life insurance company.

The Employer and Employee Association Trust Account

This is commonly known as a group IRA. It is a traditional IRA setup by either an employer, union or an employee association for employees or members.

The Simplified Employee Pension (SEP-IRA)

This is a type of traditional IRA that is set up by an employer for all of their employees. With this type of account, employer can contribute $30k or fifteen percent of an employee’s salary annually to their IRA.


This another type of traditional IRA that is set up by small employers for their employees. This type of IRA enables an employee can contribute a certain amount of money into the IRA with the employer then matching the employee’s contribution based on a percentage of the employee’s pay.

The Spousal IRA

This is either a traditional or Roth IRA funded by a married tax payer for their spouse, who receives an income of less than $2k a year. An important note to remember is that any year a contribution is made to this IRA, the couple must file jointly on their taxes.

The Rollover IRA

This is yet another form of traditional IRA which allows an individual to receive a distribution from a retirement plan.

The Inherited IRA

This type of IRA can be traditional or Roth IRA that is passed down to a non-spousal beneficiary of a deceased IRA owner.

The Education IRA

This IRA is established in order to provide funds that will allow a beneficiary to pay for higher education. There is no tax deduction for contributing to this IRA. However, withdrawals are not subject to tax.


It can be hard to understand and confusing to figure out which one of these various types of IRA is the right option for you and your retirement plan. For those with an IRA already, and you want to transfer the money or invest it differently you will need to speak to a financial adviser to access your options. There are several  different types of investment brokers that can help you invest your IRA funds in various ways, whether you want them in stocks, bonds, or precious metals.