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An IRA is a type of retirement plan that allows significant tax benefits for savings in US tax law. Unlike some plans, IRAs can either be offered by an employer or created by an individual. Most IRAs allow contributions to be made before taxes are removed from an individuals paycheck.

Types of IRAs

There are a number of different types of IRAs that offer different advantages. Traditional IRAs are the base, and the difference is what defines the other IRA types. Roth IRAs differ from other IRAs in that contributions are made after tax, so withdrawals are tax free.

Though Traditional and Roth IRAs are the most popular, there are several other forms of IRAs, including SEP IRAs (which are often used by smaller companies or self-employed people), SIMPLE IRAs (more similar to 401(k) plans than other IRAs), and Self-Directed IRAs (which allow an individual to manage their own fund).

There were formerly several other types of IRAs, including Rollover, Conduit, and Educational IRAs. These have either been eliminated, or renamed in the case of Educational IRAs.

Tax treatments of most IRA types are very similar, with the exception of Roth IRAs.

Contributions

Only cash can be contributed to IRAs. As of 2008, the contribution limit for IRAs is $5000 per year, or $6000 if the individual is 50 years of age or older. However, contributions cannot be more than the annual income of the holder.

Funds can be transfered between IRAs and most other retirement accounts. There are a few exceptions, but for the most part IRAs and other retirement accounts can be freely combined.

Getting the Money Out

Generally there are strong penalties for withdrawing funds from retirement plans with tax benefits, and IRAs are no exception. In this case, funds cannot be withdrawn without significant penalties before the holder reaches the age of 59 and 1/2. Exceptions allowing withdrawals include educational expenses, if the holder becomes disabled, or the first time the holder buys a house.

There are also penalties associated with holding funds in IRAs too long - if no withdrawals are made before the holder reaches 70.5 years, funds in the IRA will begin to be lost.

Direction

Most IRAs are managed by a designated custodian. The exceptions are Self-Directed IRAs. For the most part, IRAs consist of securities, though some other assets are allowed.