Individual retirement accounts (IRAs), encompass a range of retirement savings plans that provide tax benefits to participants. Unlike financial products that mature, such as a bond or a certificate of deposit (CD), IRAs do not technically mature. Instead, account holders must start receiving distributions by April 1 of the subsequent year after the year in which they reach age 701/2, according to the Internal Revenue Service.
In 1974, congress enacted the Employment Retirement Income Security Act (ERISA), to allow for the creation of IRAs to help workers save for retirement. At first, IRAs were only available to workers not eligible for qualified retirement plans through their employers, but additional legislation passed in 1981 that opened the program to any taxpayer under the age of 70 1/2.
Required Minimum Distributions
Rather than a maturity date, IRA funds must be distributed starting at age 70 1/2. If distributions are not made, or are insufficient, the account owner or beneficiary may have to pay a 50 percent excise tax on the undistributed amount. Each annual distribution after age 70 1/2 must be completed by December 31 of the following year. Minimum distribution amounts are based on factors, such as IRA account balance, distribution periods and the account holder's life expectancy.
Traditional IRAs can be opened by any individual or their spouse who earned taxable income during the year, and is under age 70 1/2. Even individuals with employer-sponsored retirement plans can open an IRA, although not all contributions are tax deductible. Contributions must be made in monetary form, and submitted by the tax filing date for that year. Distributions are subject to taxes.
Unlike traditional IRAs, contributions to Roth IRAs are non-deductible. However, qualifying distributions from Roth IRAs are tax free. Those over age 70 1/2 can continue contributing to Roth IRAs. Individuals or married couples must fall within maximum income requirements in order to contribute to a Roth IRA.
SIMPLE and SEP
Other types of IRAs include the Savings Incentive Match Plan for Employees (SIMPLE) and the Simplified Employee Pension (SEP). Both allow employers to contribute to an employee’s IRA. Small businesses with fewer than 100 employees, and no other retirement plans, can offer SIMPLE IRAs to employees. These programs require employers to contribute up to 3 percent of an employee’s compensation for employees that contribute or, two percent for non-contributing employees. SEP IRAs are open to any size business. In a SEP plan, only employers contribute, and annual contributions are limited to 25 percent of an employee’s compensation.
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