IRA Plans Key Terms

Consider IRA plans key terms to understand your individual retirement account options

By Mary Spencer-Huber

The term IRA stands for individual retirement account. There are a variety of different IRA options available to investors seeking a way to build savings for retirement, including self-directed IRA's, simple IRA's for the self-employed and IRA's created by employers. To thoroughly understand IRA options, it's best to familiarize yourself with the various different types of IRA's as well as some key terms. By understanding different IRA options, investors can protect themselves from unwanted taxes or penalties.

SEP IRA

The SEP IRA, also known as the Simplified Employee Pension Plan, allows the self-employed or employers to establish a retirement plan. The SEP allows employers to make tax deductible contributions for their employees. Taxes on these contributions are deferred until the money is distributed to the employee. In order for this to work, the employee must also maintain a traditional IRA, into which these contributions are deposited.
Try: Beacon Capital Management Advisors offers information about the SEP IRA, such as contribution limits, contribution deadlines and establishing an account for self-employed individuals without employees.

Simple IRA

The simple IRA, which is an account created by an employer or self-employed individual, enables employees to make pre-tax contributions from their earnings. Money placed into the account is considered to be an elective deferral or salary reduction. It's an elective deferral, because it isn't taxed until the money is distributed, usually after retirement. It's a salary reduction, because the money comes directly from the paycheck.
Try: The United States Department of Labor provides a detailed description of the Simple IRA, including advantages, eligibility, steps necessary to establish such a account, operating the account and closing the account.

Self-directed IRA

Self-directed IRA's are also known as checkbook IRA's, because money is deposited directly into the individual's account for immediate use. The self-directed IRA, allows the investor to invest in anything that the internal revenue code allows. Some self-directed IRA's include real estate, limited liability companies, private stock offerings, leases and lease options and joint ventures.
Try: Pensco Trust Companies offer more details about the use and benefits of self-directed IRA's.

IRA withdrawal

The IRA withdrawal is also known as an IRA distribution. According to tax law, individuals must begin taking distributions from their accounts when they reach 70.5 years of age. There are minimum distributions or withdrawals that must be taken from these accounts once the account holder reaches 70.5 years. These distributions vary from year to year as formulas change.
Try: Mutual of America provides detailed information investors need to know about IRA withdrawals.

IRA rollover

An IRA rollover refers to the transfer of money from a retirement account into a Roth IRA or a Traditional IRA. An IRA rollover can occur through one of two methods, including a direct transfer or a check. There is a 20% penalty if the check does not rollover directly from one custodian to another.
Try: Learn more specifics about the nature of IRA rollovers at Roll Over IRA.

Roth IRA

The Roth IRA is a particular type of individual retirement account. Contributions to the Roth IRA are made with post-tax dollars. The principle on the Roth IRA grows tax free. There are no taxes required when money is withdrawn. Basically, with a Roth IRA, you pay taxes one time and then your money grows without any further tax assessment.
Try: For a more detailed description of a Roth IRA, visit IRS.gov.