Individual Retirement Accounts, The Basics

Looking Towards Retirement

Over the past 25 years, the responsibility for a secure retirement has shifted—directly onto your shoulders.  Employment no longer guar­antees a pension plan, and even those Americans who have faith in Social Security know that future payments will require significant supplementation from other sources.

While more and more Americans are taking advantage of voluntary work-sponsored plans such as 401(k)s, many realize that the company program alone may not meet all retirement needs.

This shift to individual responsibility was recognized in 1974 by the government, when Individual Retirement Accounts (IRAs) were established as a form of personal retirement plan.  The IRA itself does not pay taxes, so earnings grow without the burden of annual taxation.

Over the years rules shifted, but IRAs continued to be an important part of any comprehensive retirement plan.  Recent legislation has expanded your options, expanded investment limits and made IRAs even more attractive for most investors.  But it’s worth emphasizing the underlying message that is being communicated by Congress’s expansion of IRAs: take responsibility for your future retirement.

An Individual Retirement Account is a personal retirement account that helps individuals save for their own retirements.  IRAs offer either tax-deferred or tax-free growth of any earnings.  Some IRAs even provide tax-deductible contributions.

The goal of this guide is to provide a general understanding of the types of IRAs that you can choose from, the reasons why you’d prefer one type over another – and then provide an important discussion of common IRA distribution mistakes you can make, and how to avoid them.

The types of IRAs that are now available are:

  • Traditional IRA
  • Roth IRA
  • Spousal IRA
  • Rollover IRA
  • Educational IRA (Educational Savings Account)
  • SEP-IRA

Before you are overwhelmed, you’ll quickly see that your choices will narrow down quickly based on your particular financial situation. Learn about the different types of IRAs.