What Is An IRA?

An IRA is provided and maintained by many financial institutions. IRAs are of various types: individual retirement account are the most common. There are also trust or a custodial accounts that are set up for tax benefits. They are for the exclusive benefit of the person setting it up, They can also benefit his or her beneficiaries. There is also an individual retirement annuity.

There are several different types of IRAs.

1. Traditional IRA: Contributions to a Traditional IRA are usually tax-deductible. That means that they reduce the amount of income that you base your tax calculations on. Any gains that you make within the account and don’t withdraw are not subject to taxation so long as they stay in the account. Any withdrawals you make during retirement are taxable to you as income.

2. Roth IRA: Contributions to a Roth IRA are from after-tax income. That means you have already paid taxes on that income. The gains you make and keep in the account are not subject to taxation as they accrue. Withdrawals are ordinarily tax-free.

3. SEP IRA: A SEP IRA is used by a small business employer or a self-employed individual to make contributions to a Traditional IRA. They are used to make contributions in the name of the individual instead of to a pension fund that is in the name of the employer.

4. SIMPLE IRA: This is a Savings Incentive Match Plan for employees, in which the employer match contributions made by the employee. It is similar to a 401(k) but simpler and less expensive to administer. Although it is called an IRA it is somewhat different from the other IRA types.

5. Self-Directed IRA: A Self-Directed IRA allows the holder of the account to administer the account investments for him or herself.

Rollover IRAs and Conduit IRAs are older versions of IRA that are now considered to be Traditional IRAs.

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