Individual Retirement Account (IRA)* Basics

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The individual retirement account (IRA) has become one of the most popular retirement savings vehicles since its creation in 1974. For many people, it makes sense to have an IRA in addition to saving in a 403(b) plan through your employer.

Popular Options

The two most well-known types of IRAs are the traditional and Roth.

The traditional IRA is the oldest and most popular IRA. Anyone younger than 70 1/2 with earned income can contribute to a traditional IRA. Your contributions may be tax-deductible, depending on your circumstances.** You can contribute up to $5,500 to an IRA for 2014. People over age 50 can make an additional $1,000 catch-up contribution. The deadline to contribute for 2014 is April 15, 2015.

You can defer taxes on the account earnings until you begin taking distributions – as early as age 59 1/2, but no later than age 70 1/2.*** Your IRA distributions will be taxed at ordinary income tax rates at that time.

The Roth IRA was introduced with the Taxpayer Relief Act of 1997, providing another tax-advantaged savings vehicle for Americans. This type of IRA gives you tax-free growth, providing you have held the account for at least five years and are age 59 1/2 or older when you begin withdrawals.† The same contribution limits for the traditional IRA apply to the Roth IRA.

Where Can You Invest in an IRA?

You can open an IRA through a bank, a credit union, a mutual fund company, or a brokerage house. In many cases, you can open your account online or over the phone. Before you open your IRA, it is important to find out:

  • What is the minimum initial investment?
  • What is the minimum amount for additional contributions?
  • What fees do you charge?
  • What savings or investment options are available?

What Can You Put in an IRA?

Generally, you can have cash, stocks and stock funds, bonds and bond mutual funds, money market funds and certificates of deposit in your IRA. You may also put real estate in an IRA, but only real estate purchased for investment (not your residence, for example). You may not put collectibles, such as antiques and art, in an IRA, although there is an exception for certain gold and silver coins. Talk to your tax advisor if you have any question about what is an acceptable investment in your IRA.

* Note that the IRS refers to these accounts as Individual Retirement Arrangements (see IRS Publication 590). However, they are commonly known in the industry as individual retirement accounts.
** Deductibility depends on whether you or your spouse is an active participant in an employer’s retirement plan, and on your income.
*** Withdrawals prior to age 59½ may be subject to a 10% IRS penalty. Required minimum distributions (RMDs) must begin after age 70½. Otherwise a penalty of 50% of the amount that should have been withdrawn, but wasn’t, may be imposed.
Withdrawals prior to age 59½ may be taxable and subject to a 10% IRS penalty.