Individual Retirement Accounts are accounts that taxpayers use for their retirement plans. You can set aside some money every year that goes towards your retirement and can usually get a tax cut for the amount you put in your IRA. You can also put a smaller amount of money in the IRA for a nonworking spouse.
There are a few different types of IRA accounts that can be used. Each have benefits and advantages. Here are the main ones.
1. Traditional IRA: All money put in the traditional IRA is usually tax-deductible. That means you can put money in before you are taxed on it. Any money inside a traditional IRA does not have a tax impact. Once you make withdrawals from the account, however, it is taxed as income.
The only time your money is not taxed is when it is inside the IRA. If you only take a portion of money out of the account, the portion that is left in the account is not taxed. Traditional IRAs are often referred to as non-deductible IRA or deductible IRA because of this reason.
2. Self Directed IRA: Self directed IRAs are the only IRAs that allow the account holder to make investments on behalf of their retirement plans. People using self directed IRAs are not limited to investing in any particular type of investment. That means people investing in self directed IRAs can invest in stocks, bonds, mutual funds, or whatever else they care to invest in and that investment goes toward their retirement.
3. ROTH IRA: Roth IRA contributions are made after the money is taxed. That means that once the money is withdrawn they are usually tax-free. Any transactions within the Roth IRA do not have a tax impact.
4. SEP IRA: This IRA allows an employer to make a retirement plan towards a Traditional IRA for one of their employees. It is usually done by small businesses or by a self-employed worker. This is an alternative to a pension fund account.
5. SIMPLE IRA: a simple IRA allows both the employee and employer to make contributions. It is a simplified version of the SEP IRA, but with lower contribution limits so it does not cost as much. Simple IRA has easier administration tactics than SEP IRAs.