What Is an IRA, Anyway?

What is an IRA? If you can't answer, you need to read this!

Mar 29, 2014 at 8:00AM

No matter your age or profession, once you enter the workforce, you should be able to confidently answer the question: "What is an IRA?"

The answer: one of the most important tools to save for retirement and become financially independent. IRA stands for "individual retirement account," and as you'll see, there are several different types you can use to get tax-advantaged savings and growth. Most importantly for the immediate future, you have until April 15 to max these accounts out for the 2013 fiscal year.

What is an IRA? It's many different things
There are four primary types of IRAs that individuals should be aware of. Based on your employment status and your income, you may not be eligible for all of them.

Type of IRA

Who Can Use It?

When are Taxes Paid?

Yearly Contribution Limits for 2013 Tax Year


Anyone under 70.5 who earns taxable income. However, the amount that's deductible depends on whether you have a retirement account through your employer, and what your income is.

When money is withdrawn during retirement, at your then-tax rate

$5,500 (or $6,500 if you are over 50)


Anyone who earns freelance income, is self-employed, or works for a company that chooses to set up SEP IRAs (and has worked for the company in three of the past five years)

When money is withdrawn during retirement, at your then-tax rate

The lesser of 25% of compensation for employees, or 20% for self-employed (up to $255,000), or $51,000


Anyone who works for a company with 100 or fewer employees (including the self-employed and freelancers), and whose company chooses to participate

When money is withdrawn during retirement, at your then-tax rate

Employer is required to either provide 3% match or 2% of salary (up to $255,000 salary).

Total limit including employer and employee contributions is $12,000 ($14,500 if over 50).


Anyone who has taxable income, though the amount you are allowed to put in may be limited if you earn more than a certain amount in any given year

Before money is ever put into the account

$5,500 ($6,500 if over 50)

Source: IRS

When it comes to understanding the tax benefits of these types of accounts, the following graphic breaks down where the advantages lie.

Tax Table

For most people reading this, the best option is ...
That's a lot of information to swallow, but the basics are actually pretty simple. If you have a retirement plan through your employer, the Roth IRA is usually the best option for any extra money you want to set aside.

Though contributions aren't deductible, they grow and can be disbursed tax-free. And if, for any reason, you need the money before you reach retirement, you can withdraw any principal you've contributed and has been in your Roth for more than five years without any penalty.

If you're not like most ...
If you're self-employed or a freelancer, SEP and SIMPLE IRAs are attractive options. You could still be eligible for these IRAs if you aren't self-employed, but that's a decision that your employer -- not you -- has to make.

SIMPLE plans require contributions from employers and have lower contribution limits. SEPs, on the other hand, are highly lucrative for the self-employed, as you can sock up to $51,000 away for 2013 and have that money deducted from what you owe the IRS at the end of every year.

While we're on the subject of taxes, look at what the IRS is daring you to do!
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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