Different Kinds of IRAs

by Catherine Rein
(last updated April 24, 2009)

The number and variety of IRAs can be confusing and overwhelming at first, but after a bit of research you can find the IRA that meets your needs. Opening an IRA is a great way to invest for retirement or college and depending on the type of IRA you choose, you won't pay taxes on any money earned from investments until you withdraw the money from the IRA. There are eleven different kinds of IRAs. They are designed for different types of investors and for different purposes. You can find more information on the various IRAs here:

  • Individual Retirement Account. These are the most common. They include Traditional IRAs and Roth IRAs and are designed for individual investors to save money for retirement through a bank, broker or other financial institution. They will likely include stocks, bonds, money markets or CDs as the primary investments. Traditional IRAs provide investment on a tax-deferred basis and allow you to begin withdrawing the money without a penalty at age 70-1/2. A Roth IRA provides investment tax-free and the flexibility to withdraw some of your money before hitting age 70-1/2. Qualified distributions from a Roth IRA is a withdrawal that meets one or more of the following requirements: a withdrawal after the taxpayer reaches age 59 -1/2, a withdrawal to a beneficiary after the taxpayer's death, a withdrawal made after the taxpayer becomes disabled or a withdrawal by a first-time homebuyer to acquire a principal residence.
  • Group IRA. This is a traditional IRA setup by employers, unions and other employee associations for employees or members. They are sometimes called Employer and Employee Association Trust Accounts.
  • Other Types. Other less common types include Simplified Employee Pension (SEP-IRA) and Savings Incentive Match Plan for Employees (SIMPLE-IRA). 529 Plans and pre-paid tuition plans are sometimes called Education IRAs. These allow tax-free investment and the money can be taken out at any time without penalty to be used for education expenses, usually college tuition.

If you are deciding where to put your savings dollars think about this investment "pecking order." Briefly, the rank of where to put retirement savings should be in the following order: 1) Employer plan with a match, 2) Roth IRA, 3) Employer plan without a match, 4) Traditional IRA, 5) Taxable investment, 6) Annuity. This retirement savings order prioritization maximizes the return and minimizes taxes and commissions.

Remember to talk to a professional financial advisor with any questions before investing money in any kind of Retirement or Education IRA.

Author Bio

Catherine Rein


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