There are 11 (count 'em, 11) types of IRAs. There are individual IRAs, Group IRAs, SEP IRAs... Do any of these sound familiar? Of course they do!

You've often scratched your head and wondered aloud in the still of the night, "What's SEP, anyhow?" Your spouse, naturally, thinks you're asking, "What's up, anyhow?" and, rolling over and grumbling, can't understand why you would want to raise that question just then. This has no doubt been the source of many a midnight spat between the two of you. You say, "SEP-IRA." Your spouse rolls over and says, "You made me roll over again." Back and forth it goes: SEP-IRA? Rollover. SEP-IRA? Rollover. And so it continues, on and on, until at last the two of you end up either at a marriage counselor or as reluctant subjects in a sleep deprivation study.

In order to save you and your spousal unit from this fate, then, we present the 11 types of IRA (including, of course, the Spousal IRA):

  1. An Individual Retirement Account is either a traditional or Roth IRA set up with a financial institution like a bank, broker, or mutual fund in which contributions may be invested in many types of securities such as stocks, bonds, money market, and CDs.
  2. An Individual Retirement Annuity is either a traditional or Roth IRA set up with a life insurance company through the purchase of a special annuity contract.
  3. An Employer and Employee Association Trust Account, or group IRA, is a traditional IRA set up by employers, unions, and other employee associations for employees or members.
  4. A Simplified Employee Pension (SEP-IRA) is a traditional IRA set up by an employer for a firm's employees. An employer may contribute up to $30,000 or 15% of an employee's compensation annually to each employee's IRA. (See our Retirement Plan Primer for a more complete discussion of SEPs).
  5. A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a traditional IRA set up by a small employer for a firm's employees. In 2001, an employee may contribute up to $6,500 per year to these IRAs. This contribution limit will increase each year through 2005, when it will reach $10,000. In 2006 and later years, the allowable contribution will increase in $500 increments whenever the cumulative effects of inflation indicate such a rise is needed. The employer sponsoring the SIMPLE will also make a matching contribution based on a percentage of the employee's pay. In 2001, the combined employer-employee contribution to the participant's account cannot exceed $13,000. (See our Retirement Plan Primer for a more complete discussion of SIMPLEs).
  6. A Spousal IRA is either a traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has less than $2,000 in annual compensation. The couple must file a joint tax return in the year of the contribution. The working spouse may contribute up to $2,000 per year to the Spousal IRA and up to $2,000 per year to his or her own IRA. A couple, then, may contribute up to $4,000 per year provided neither IRA receives more than $2,000.
  7. A Rollover (Conduit) IRA is a traditional IRA set up by an individual to receive a distribution from a qualified retirement plan. Distributions transferred to a rollover IRA are not subject to any contribution limits. Additionally, the distribution may be eligible for subsequent transfer into a qualified retirement plan available through a new employer. To retain this eligibility through Dec. 31, 2001, the IRA must be composed solely of the original distribution and earnings (i.e., no other contributions or rollovers may be added to or mingled with the IRA), and the new employer's plan must allow the rollover. After Jan. 1, 2002, commingling of conduit IRA money with other IRA or qualified retirement plan money is permitted, and the mixing of such monies will have no impact on the ability to transfer those IRAs to a new employer's retirement plan.
  8. An Inherited IRA is either a traditional or a Roth IRA acquired by the non-spousal beneficiary of a deceased IRA owner. Special rules apply to an inherited IRA. A tax deduction is not allowed for contributions to this IRA, a rollover to or from another IRA owned by the heir is not permitted, and the proceeds must be distributed and taxed within a specific period as established by the Internal Revenue Code. See " Designating IRA Beneficiaries" for details on the various distribution requirements of inherited IRAs.
  9. An Education IRA (EIRA) is an IRA established to provide funds that will allow a beneficiary to attend a program of higher education. There is no tax deduction allowed for the contribution, but all deposits and earnings may be withdrawn free of tax and penalties if used to pay for the costs of higher education. Beginning in 2002, EIRA proceeds may also be used free of tax and penalty to pay for the qualified expenses of a kindergarten through 12th grade education in public, private, and/or religious schools. EIRA contributions are limited to a maximum of $500 per year, but that's in addition to the $2K limit on any other IRA. Beginning in 2002, allowable EIRA contributions increase to $2,000 per year. For full details on contribution limits and distributions, see "The Education IRA."
  10. A Traditional IRA is the term for a regular IRA available to those under age 70 1/2 who have earned income (i.e., job compensation). Earnings within the traditional IRA grow tax-deferred until withdrawal. Withdrawals must begin, and will be taxed, when the owner reaches age 70 1/2. If required distributions are not taken at that age, a 50% penalty will be assessed on the amount not taken. When made, contributions may or may not be tax deductible depending on the factors discussed previously. A working spouse not covered by a retirement plan through employment may make a tax-deductible contribution of up to $2,000 annually to an IRA despite the other spouse's coverage under an employer-provided retirement plan. When the couple's AGI reaches $150,000, deductibility for such contributions begins to decline, and it reaches zero at a joint AGI of $160,000.
  11. A Roth IRA is an IRA in which:
    • Contributions to the account are not deductible.
    • "Qualified" distributions (i.e., withdrawals) from the account are not taxable.
    • Earnings on the account are taxable and subject to an early withdrawal penalty only when a withdrawal is not a "qualified" distribution.

A "qualified" distribution from a Roth IRA is a withdrawal that meets one or more of the following:

  • Made after the taxpayer attains age 59 1/2
  • Made to a beneficiary after the taxpayer's death
  • Made because the taxpayer is disabled
  • Made by a first-time homebuyer to acquire a principal residence

No withdrawal except those attributable to previously taxed contributions will be a qualified distribution unless it is made after the five-tax-year period beginning with the tax-year in which the taxpayer first contributed to a Roth IRA.

Annual contributions to a Roth IRA are subject to the contribution limits shown previously in "What IS an IRA" as reduced by any contribution made to a traditional IRA. Contributions to a Roth IRA may be made even after the owner reaches age 70 1/2. The annual contribution limit is phased out as AGI increases from $150,000 to $160,000 (married filing jointly) or $95,000 to $110,000 (single filer).

Amounts in traditional IRAs may be transferred to Roth IRAs provided the taxpayer's AGI (married or single) for the transfer year is $100,000 or less. Transferred amounts must be included in that year's income, but the money transferred will be exempt from the 10% excise tax for a withdrawal prior to age 59 1/2. No withdrawal allocable to earnings on the transferred amounts is considered to be a qualified distribution unless it is made more than five tax-years after the transfer.

Further details on IRA provisions may be found in IRS Publication 590, Individual Retirement Arrangements. This publication may be obtained at no cost by calling 1-800-TAX-FORM or downloading it from the IRS website.