What You Must Know About Different IRA’s

Individual retirement accountsIndividual retirement accounts have a commonality and that is they are an investment used by investors saving for retirement.   But IRA’s come in all shapes and sizes which is what makes them also unique.

Individual Retirement Accounts can be “packaged” in many different ways. IRA’s can be “packaged” as the standard Traditional IRA and Roth IRA’s.  Or they can be “package” as a Stretch IRA, an IRA Trust or a Custodian IRA.

Each IRA type is used by investors for a different purpose. As an investor, you want to learn about the different IRA types because someday you may have a unique need.

Some IRA’s are specialty IRA’s so not all banks or financial institutions have the knowledge or experience necessary to work with them or to even be able to educate you as an investor.   So ask lot’s of questions of your advisers when looking into some of the specialty IRA’s.

Let’s review how each Individual Retirement Account is used.

The Differences In IRA’s :

Traditional IRA

  • Used by investors to save for retirement.
  • Investors who do not have a 401k plan at work can use a Traditional IRA for to save for retirement.
  • Contributions to a Traditional IRA can be tax-deductible.
  • Depending upon your income level, you can invest in your 401k plan at work and also in your IRA.
  • For 2010, the Traditional IRA maximum contribution limit is $5,000
  • If you are over age 50, you can also make a catch-up contribution of $1,000.

Roth IRA

  • Roth IRA contribution limits are the same for 2010 as the Traditional IRA limits.
  • Roth IRA’s are also used to save for retirement.
  • Contributions to a Roth IRA are made with after-tax money.
  • Contributions are not tax-deductible.

Stretch IRA

  • A Stretch IRA is sometimes called an Inherited IRA.
  • Inherited because it gets passed onto the next generations.
  • A Stretch IRA is a specialty.
  • Stretch IRA’s are set up to defer taxes and the deferral can be indefinite.
  • A Stretch IRA can benefit multiple generations, if set up properly.
  • It can also harm multiple generations if not set up properly.
  • Since they are a specialty not all financial institutions have the knowledge to work with them.
  • So be sure to ask your financial institution about their experience with Stretch IRA’s before you commit to work with them – – it could affect future generations.

IRA Trust

  • An IRA Trust is when the account holder names a trust as the IRA beneficiary instead of a person.
  • This again can be considered a specialty because of the unique tax issues associated with an IRA Trust.
  • Since it is a specialty IRA, not all financial institutions have the experience or knowledge to work with them.
  • So be sure to check with your accountant for clarity.

Custodian IRA

  • A Custodian IRA is often opened for children.
  • The account is then managed by a parent or guardian for the benefit of the child.
  • A Custodian IRA can be set up as a Roth IRA account or Traditional IRA.

Individual Retirement Accounts can be a valuable investment tool if used properly.

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