Individual Retirement Arrangements, or IRAs, are accounts meant for retirement savings. There are several types of IRAs and a number of exceptions and variations of the different types. These are different than 401(k) plans which are also retirement accounts. An IRA may also have implications for asset protection. Larger (catch-up) contributions can be made by those turning 50 during the year. See below for the 2010 IRA contribution limits.
- Traditional IRA This is normally a pre-taxed deposit that is taxed later when the money is withdrawn (There is a penalty for early withdrawal). Deposits can also be made after taxes but be sure to keep records from year to year so that when a withdrawal is made it is not taxed again.
- Educational IRA is where money is saved for use for educational expenses.
- SEP IRA is a Simplified Employee Pension (SEP). This is a simplified retirement plan with minimal requirements. This can be done in place of a Qualified Retirement Plan (QRP) (formerly called Keogh plan).
- Simple IRA. A simplified retirement plan.
- Roth IRA. The plan here is to put in money that is already taxed but the earnings would not be taxed later when withdrawn in retirement. There is much discussion of converting to a Roth IRA. However, this is complicated because you would be taxed on the money now but the earnings would not be taxed down the road. Since you do not know the tax rates in the future or how much income you may have in the future it is a complicated decision and it is based on estimates of the future which may not end up being true.
Most people open up an IRA account with a stock broker or other similar methods. However, there can also be self-directed IRA where any type of investment can be made. However, this is complicated and requires a custodian.
2010 Combined Traditional and Roth IRA Contribution Limits
If you are under 50 years of age at the end of 2010: The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).
If you are 50 years of age or older before the end of 2010: The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2010. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000. The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.
To read more see this Internal Revenue Service(IRS) link to IRS Publication 590: