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

Traditional

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When money is withdrawn during retirement, at your then-tax rate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

SEP

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When money is withdrawn during retirement, at your then-tax rate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

SIMPLE

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When money is withdrawn during retirement, at your then-tax rate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

Roth

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.

Try any of our Foolish newsletter services free for 30 days. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers