Ira Accounts - Ira Contribution

Types Of IRA Accounts

An individual retirement account (or IRA) is a personal savings plan for individuals saving up for retirement. It is different from regular savings plans in that it has income tax advantages. You invest money in an IRA up to the amounts allowable in the tax law. These investments are called “contributions” Whatever earnings this contributions accumulate (i.e., earnings directly derived from the contribution as well as earnings derived from these earning, and so on and so forth) is free from any taxes. Taxes are only levied when a withdrawal (also called Distribution) is made from the IRA. There are three types of IRA Accounts: Deductible IRA, Non-Deductible IRA and Roth IRA.

The first of the three types of IRA Accounts is the Deductible IRA. This type of IRA Account has two major benefits. The first benefit is that you do not pay taxes on your contributions until you make a withdrawal. The second benefit is that any interest, dividends, or capital gains that accumulate from this IRA account are also tax-deferred until withdrawal. Therefore, by contributing to this first of three types of IRA Accounts, you get a tax break for the year of contribution, and any profits will grow tax-deferred until the next year.

Unfortunately, only a few qualify for the Deductible IRA. In most cases, therefore, only the second of three types of IRA Accounts, the Non-Deductible IRA, is the option available. As the name suggests, contributions to Non-Deductible IRAs are not entitled to tax breaks or tax deferments. Also, withdrawals are still subject to taxes. Initially, when IRAs were first created, anyone with earned income was qualified for Deductible IRAs. However, because of the Tax Reform Act of 1986, eligibility criteria were put in place which resulted in the disqualification of many income earners. This Act had created problems with many of those less vigilant of its implications, i.e., those who used to be qualified for this first of three types of IRA Accounts in the 1980's prior to the Act, continued to make contributions even after 1986 which then went into the second of three types of IRA Accounts, the Non-Deductible IRA. Those who did not keep good records, ended up with getting taxed on ALL the contributions, including those that were made when they were still qualified for the Deductible IRA.

The third, and newest of the three types of IRA Accounts is the Roth IRA, named after its sponsor in Congress, then Senator William Roth of Delaware. It is like the Non-Deductible IRA wherein contributions and earnings are not tax-deductible or tax-deferred. However, unlike the first two types of IRA Accounts, withdrawals (also called distributions) from Roth IRAs are completely tax-free, provided that you leave the money in the plan for at least five years from the first contribution, or you reach the age of 59½, with death or disability as the only exceptions. Also unlike the first two types of IRA Accounts, where you are mandated to start making withdrawals when you reach the age of 70½ and are not allowed to make additional contributions after that age, the Roth IRA has no such restrictions.

The third of three types of IRA Accounts also has an additional feature as introduced by Congress. You can convert any of the first two types of IRA Accounts (Deductible IRA and Non-Deductible IRA) into a Roth IRA provided that you adjusted gross income does not exceed $100,000.

Ira Contribution