An enormous amount of money is held in Individual Retirement Accounts (IRAs.) There are five types of IRAs - the traditional IRA, the Education IRA, the SEP IRA, the Simple IRA, and the Roth IRA. You will hear about a "stretch IRA" - this is not a type of IRA, but is a method of paying out the money in the IRA.
The first four IRAs involve contributions of funds to an account that is not subject to income taxes as it grows. The contribution to the IRA is generally not subject to federal income taxes until the money is withdrawn. In the case of the Roth IRA, the money is not deductible when it is contributed, but the fund grows free of income tax and the growth is not subject to tax when the funds are withdrawn.
The IRA has several advantages. The first is that it is readily available to anyone who is eligible to participate - you must have taxable earned compensation and you must not have reached age 70-1/2 by the end of the year in which you contribute. The second is that it permits funds to grow tax-free. The third is that distributions from an IRA can often be spread over a long period of time, so the principal can still grow and the taxes can be spread out.
IRAs are intended to help people save for retirement. The regulations regarding management of IRAs and withdrawals from IRAs are very strict, because the government does not want taxpayers to gain tax advantages and then take the funds out other than for their retirement. Similarly, the intention is to force taxpayers to draw funds out during their retirement years, and not simply let the funds accumulate until death.
The IRS regulations dealing with IRAs are among the most technical in the Internal Code. If you violate the regulations, the tax consequences can be very serious.
From time to time the IRS issues revised regulations to make compliance and planning simpler. Often the revisions make things more complicated.
This is not a do-it-yourself area. If you have any questions about establishing an IRA, funding it, or drawing out the money in an IRA, we will be glad to help you with advice and suggestions.
