- Qualified retirement programs at the company level are nothing new, but IRAs are a recent development. They were first authorized by Congress as part of the Employee Retirement Income Security Act in 1974. The first IRAs were only available to self-employed taxpayers and those who worked for companies that did not offer any type of qualified retirement program. Since 1974, Congress has expanded access to IRAs to cover most taxpayers who have earned income.
- There are a number of types of IRAs including traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs. SEP IRAs and SIMPLE IRAs are employer-sponsored plans, while traditional and Roth IRAs are available to most taxpayers, regardless of whether they are covered by another qualified plan. Each type of IRA has specific rules and regulations that govern how it is administered, but all act as holding accounts for investment and savings products, which may vary from individual to individual.
- Individuals are limited in the amount of money they can contribute to their IRAs. Maximum contribution limits have been adjusted several times since IRAs were first introduced. The maximum annual limit was $5,000 as of the 2009 tax year, although this figure may be adjusted due to age and income. Individual taxpayers have taken advantage of the tax benefits offered by IRAs. As of the third quarter of 2009, there were more than $4.1 trillion dollars invested in IRA accounts, according to the National Association of U.S. Investment Companies.
- IRAs were designed to provide a tax-advantaged means of saving for retirement. Contributions to traditional IRAs can be deducted from the account holder's federal income tax, and the funds inside the account are allowed to grow tax-deferred until they are withdrawn. Contributions to a Roth IRA are made with after-tax dollars, but the funds inside this type of account grow tax-free and withdrawals are not considered taxable income, provided they have remained in the account for at least five years. The account holder can put almost any kind of investment or savings product into her IRA. The type of product selected determines whether the rate of return is fixed or variable, for instance a bank certificate of deposit might return a fixed interest rate, while a stock mutual fund produces a variable rate of return.
- IRAs are by definition a type of retirement account. Congress designed these accounts to provide tax advantages to encourage individual taxpayers to save toward their own retirement. Account holders may access the funds in their IRAs at any time, but withdrawals made prior to the account holder reaching 59 1/2 years of age are considered to be early withdrawals. The funds withdrawn are taxed as ordinary income and the IRS levies an additional 10 percent tax penalty.
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