Securities

Types of IRAs


Traditional Individual Retirement Accounts

An IRA is an Individual Retirement Account. It's a personal savings plan that provides income tax advantages to individuals saving money for retirement purposes.

Contributions, Distributions and Borrowing

In 2009, you can contribute $5,000 to your IRA or $6,000 if you are over age 50. If your income is less than the defined contribution limit, then you can only contribute the amount of your income. Contributions can be made up to your tax filing date, usually April 15 of the next year.

There is nothing prohibiting withdrawals from an IRA plan. However, the withdrawals are taxable and may be subject to a 10% additional tax if the participant has not reached age 59 ½, which makes early withdrawals very unattractive.

At age 70 ½, you are required to take at least the required minimum distribution from your IRA. The required minimum distribution for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy. Employees who have not retired are still required to take the minimum distribution at age 70 ½.

There are no loans from IRAs, only withdrawals.

Roth IRAs

A Roth IRA is an individual retirement arrangement that is generally subject to the rules that apply to a traditional IRA.

Contributions, Distributions and Borrowing

The contribution limits to a Roth IRA are the same as for a traditional IRA. Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. However, "qualified distributions" from the Roth IRA are tax free. Contributions can be made to your Roth IRA after you reach age 70 ½ and you can leave amounts in your Roth IRA as long as you live.

You can't take loans against your Roth IRA. Your income and tax situation, now and what you expect it to be in the future, will factor into choosing which type of IRA is best for you.

Simplified Employee Pensions/Individual Retirement Accounts

A SEP IRA is an employee benefit plan with compliance and reporting requirements simpler than those for qualified plans such as 401(k) plans. For that reason, SEP IRAs are attractive for sole proprietors and small companies and are a viable option for offering a retirement savings plan to their employees. Contributions, which are tax deductible to employers, must be made to IRAs because IRAs are the funding vehicle for SEPs.

SEP/IRA Contributions

Contributions to a SEP are limited to the lesser of 25% of adjusted gross income or $49,000 for 2009 & 2010. The limit is subject to cost of living increases. SEP participants can still contribute up to $5,000 ($6,000 if over 50) to a traditional IRA. However, because a SEP is an employee benefit retirement plan, an employee actively participating in a SEP may not be able to deduct non-SEP IRA contributions.

SEP/IRA Withdrawals and Vesting

Employees must be permitted to withdraw employer contributions to their SEP/IRA account at any time. All SEP/IRA contributions are 100% vested at all times, meaning that all contributions to the SEP are the property of the employee participating in the SEP as soon as the contribution is made.

IRA Transfers

IRA funds can be moved from one authorized IRA custodian (a financial institution that manages the IRA fund) to another, which is called a transfer. Transfers are tax free and penalty free. A tax free movement of funds or property into an IRA is called a rollover. A rollover to an IRA may be from a qualified plan, for example, the balance from a 401(k) plan, which you decide to move to an IRA account when you leave your job, another IRA, a tax-sheltered annuity plan or the balance from an eligible government-sponsored 457(b) plan. Any funds or assets that you receive from the foregoing plans that you want to rollover must be turned over to the IRA custodian within 60 days or you will be subject to taxation and possible penalties on the amount that is not rolled over.

Questions for Your Attorney

  • Can I withdraw funds from my IRA if I have an emergency?
  • What is a "qualified distribution" from a Roth IRA?
  • I am an employer, how do I know if I am qualified to set up an SEP/IRA?
  • How much can I contribute to my SEP/IRA on behalf of my employees?

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