From: Benefits
Introduction
An individual retirement arrangement, commonly called an individual retirement account (IRA), is a personal retirement savings plan available to anyone, regardless of age, who receives taxable compensation during the year. There is no minimum or required IRA contribution.
Traditional IRA
A traditional IRA is a personal savings plan that gives employees tax advantages for saving for retirement. Contributions to a traditional IRA may be tax deductible, either in whole or in part. In addition, the earnings on the amounts in an IRA are not taxed until they are distributed, and the portion of the contributions that was tax deductible does not get taxed until distributed. A traditional IRA can be established at many different financial institutions, including banks, insurance companies, and brokerage firms. Eligibility to deduct contributions to an IRA depends on Modified Adjusted Gross Income (MAGI) and eligibility for employer sponsored retirement plans. Contributions for a traditional IRA are limited as described in IRS Publication 590.
Roth IRA
A Roth IRA is also a personal savings plan, yet operates somewhat in reverse compared to a traditional IRA. For instance, contributions to a Roth IRA are not tax deductible while contributions to a traditional IRA may be deductible. However, while distributions (including earnings) from a traditional IRA may be included in income, the distributions (including earnings) from a Roth IRA are not included in income. For both IRA types— traditional and Roth— earnings that remain in the account are not taxed. A Roth IRA can be established at the same types of financial institutions as a traditional IRA.
IRA-Based Plans
People tend to think of an IRA as something that only individuals may do. However, an employer can help its employees to set up and fund their IRAs. With an IRA, what the employee gets at retirement depends on the funding of their IRA and the earnings (or income) on those funds.
Employer-involved IRA-based plans include:
- Payroll deduction IRAs.
- Simplified employee pension plans (SEP)
- Savings incentive match plans for employees (SIMPLE).
