Individual Retirement Arrangements
An individual retirement arrangement is a personal savings plan that provides tax advantages for putting away money toward retirement. The three main advantages of an individual retirement arrangement are:
- Depending on the type of arrangement involved and your circumstances, you may be able to deduct your contributions in whole or in part in the tax year when a contribution is made.
- Contributions, including related earnings and gains, are generally not taxed (if at all) until distributed.
- An individual retirement arrangement fills in the gaps in other tax-favored ways to save for retirement, sometimes supplementing other retirement savings plans and sometimes being the only option available.
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Did You Know?
According to a December 17, 2003, Congressional Research Service report, savings held in IRAs have grown steadily from $85 billion in 1983 to $2.5 trillion at the end of 2001. Although the amount of contributions fell dramatically after 1985, tax law changes have stimulated new contributions since 1997.
A survey sited in the report also indicates that about 45.2 million households (or 41 percent of all households) owned an IRA in mid-2003. Of this amount, 36.4 million households had traditional IRAs, 16 million had Roth IRAs, and 8.2 million had employer sponsored IRAs.
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An individual retirement arrangement is very easy to set up. It can be set up with a bank, savings and loan, credit union, brokerage firm, or insurance company. They fill out the paperwork to set up an account for you. You only have to choose how your money is invested, select the type of individual retirement account (IRA) you want, and actually part with the money that will go into the account.
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Did You Know?
Effective April 1, 2006, the Federal Deposit Insurance Corporation (FDIC) has increased deposit insurance from $100,000 to $250,000 for retirement accounts at banking institutions. This increase is the result of a new law boosting federal deposit insurance coverage for the first time in more than 25 years.
Under the FDIC's new rules, up to $250,000 in deposit insurance is offered for the money a consumer has in a variety of retirement accounts, primarily traditional and Roth IRAs at one insured institution. Also included are self-directed Keogh accounts, "457 Plan" accounts for state government employees, and employer-sponsored "defined contribution plan" accounts that are self-directed (i.e., the consumer chooses how and where the money is deposited), which are primarily 401(k) accounts.
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It may surprise you to learn that there are a number of different types of IRAs to choose from. IRAs used to help save for retirement come in the following forms:
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Tip
Coverdell Education Savings Accounts, once known as Education IRAs, are not really retirement accounts. Instead of a means to save for retirement, these accounts allow parents to invest a fixed amount each year tax-free for their children's education.
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Another type of IRA that has already been discussed is an IRA used in conjunction with a Savings Incentive Match Plan for Employees (SIMPLE plan). A SIMPLE plan can also, however, be structured as a 401(k).
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