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An Individual Retirement Account, or IRA, is a retirement plan that provides tax advantages for retirement savings within United States tax law. Unlike 401k plans, which must be provided by an employer, IRAs can also be created by an individual. Aside from one specific type, IRAs contributions are made before tax.

Forms of IRAs

Different types of IRAs work in different ways. Traditional IRAs have no real distinguishing characteristics. Roth IRAs are perhaps the most different in intent, as the funds are taxed before contribution, allowing tax free withdrawals later in life.

SEP IRAs are generally offered by small businesses or self-employed indivuals. SIMPLE IRAs are more similar to 401(k) plans than other IRAs, though they have lower contribution limits and simplified administration. Self-Directed IRAs allow the holder to manage the fund themselves, rather than appointing a manager.

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.

Except for Roth IRAs, all IRAs are taxed at withdrawal.

Paying into IRAs

Money is the only type of asset allowed for contribution to IRAs. The current limit on deposit is $5000 a year, with an additional $1000 allowed for anyone over age 50. Whatever the age, no one can deposit more than their yearly income.

Money can almost always be transferred between IRAs and other retirement funds. There are a few exceptions, but in general IRAs and other retirement accounts can accept funds from one another freely.

Withdrawals

Like most retirement plans with tax benefits, there are strong penalties for withdrawing funds before reaching retirement age, here defined as 59 and 1/2 years. However, there are a handful of exceptions, including education expenses for the holder or their children and grandchildren, disability, and a one-time withdrawal to buy a first home.

In addition, withdrawals must be made after the holder reaches the age of 70 and 1/2 years, or half the money that should have been distributed will be lost.

Management

IRAs are almost always managed by a designated third-party, with the noted exception of Self-Directed IRAs. Most IRAs are consist entirely of securities, though some managers allow the inclusion of other specifically allowed assets.