Different Kinds of IRAs

Generally speaking, an Individual Retirement Account (IRA) is a retirement plan available to United States Citizens that offers a number of tax benefits, especially over the long term. It has existed since 1974 when the Employee Retirement Income and Security Act (ERISA) was enacted, and since that time a number of different kinds of IRAs have developed. Each have unique characteristics, and and some will be better than others when it comes to your person financial situation and retirement goals.

Tradional IRA

The original! With the traditional IRA, all contributions to your plan are tax deductible, meaning you don't pay taxes on the money you put in. All transactions that occur when the money is still in the account (like changes between various investments, etc.) are also tax free. When you take the money out, however, it is taxed. You are penalized at the rate of 10% for taking money out before the age of 59 1/2, and after that age you are required to take out a certain amount each year in order to avoid a penalty.

Roth IRA

A very popular alternative to the traditional IRA, the Roth IRA came into being with the 1997 Taxpayer Relief Act. You make contributions to a Roth IRA after taxes, so the funds you put in are not tax deductible like in the traditional IRA. However, you do not pay taxes on the money that you take out, so you gain the maximum advantage of the compound interest that your investments earn. You are also not restricted from taking money out of a Roth IRA account before a certain age, and do not have to take minimum payments after any age. It is possible to convert or "rollover" funds from a traditional IRA to a Roth IRA without paying any penalties, though some restrictions apply.

SEP IRA

A Simplified Employee Pension (SEP) IRA is basically a low-cost pension plan for self-employed business persons or small businesses. It allows a self-employed person to make a contribution directly to a traditional IRA in his or her name, or a small business to do the same for its employees. Often times this eliminates the need for more expensive pension management programs.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is another way for small businesses to provide for the retirement planning needs of its employees in a cost effective manner. Employees contribute part of their own earnings to the plan, and the employer matches all or part of the contribution.

Education IRA

An Education IRA, born with the same time as the Roth IRA, is a tool to provide for higher education needs. Contributions are not tax-deductible, but the beneficiary is free to withdraw the funds at any time without penalty (or tax) if it is to be used for higher education. There are many different types of IRA, but these are some of the most common. Choosing the right IRA for your needs will take you a long way towards planning for your retirement.