The Basics of IRAs
An Individual Retirement Account (IRA)
is one of the most common types of personal retirement plans. The government designed IRAs
back in 1981 as an incentive to help encourage individuals to save for retirement. By
1987, IRAs had lost their simplicity as "tax shelters". Lawmakers added
restrictions that eliminated deductions for many taxpayers. Only three years ago, Congress
wielded it's heavy hand again -- this time creating a new type of super-IRA that offers
greater benefits than previous versions.
IRAs are not actually investments -- they are really just protective shells that shield
your money from the IRS. The tax code specifies how each type of IRA should be treated.
You specify what type of investments belong in the shell. IRAs are known as defined
contribution plans. You know exactly how much you've put into the plan, but you never
really know what it will be worth down the road.
The concept of an IRA is relatively simple. You contribute up to $2,000 a year into an IRA
account. Earnings that result from your investments will not only be reinvested but will
also grow tax-deferred until withdrawal (tax-free for Roth IRAs). This tax-deferred status
means your money will compound at a faster rate over the years resulting in a greater
payout. The power of a IRA tax shelter will put you well ahead of a non-IRA type of
Types of Investments
You can put just about any type of investment you want into an IRA -- stocks, bonds,
mutual funds, cash, CDs, zero-coupon bonds, U.S. Treasuries, annuities and even gold or
silver coins (certain conditions apply) -- the typical kinds of investments you would find
outside an IRA account. Investments that don't qualify for an IRA include collectibles,
art, jewelry, real estate, or derivatives such as options or futures.
You are allowed to open more than one IRA account so long as the total amount you've
contributed for the year doesn't exceed $2,000. IRA custodians charge annual maintenance
and administrative fees for each account you have, so keeping multiple IRAs open is
probably not a wise financial decision.
- Banks, Credit Unions, Savings and Loans
- Mutual Fund companies
- Insurance companies
- Brokerage Firms - self directed accounts
that allow you to pick among a number of investments.