What are the differing types of IRAs?

In a traditional IRA, an investment may be either tax-deductible or nondeductible. A full deduction is allowed if an individual is not an active participant in an employer maintained retirement plan. However, the FERS and CSRS systems are considered such plans for this purpose. Phase-out rules on deductibility apply, depending on your modified adjusted gross income and filing status. Earnings in a traditional IRA grow tax-deferred. You generally cannot access traditional IRAs without penalty until age 59.5 or older; at age 70.5 you must begin taking distributions and cannot contribute to them.

A Roth IRA is a type of nondeductible IRA. However the earnings in the account are potentially tax-free at the time of distribution. Also, a Roth IRA is more accessible than the traditional IRA; you may take a distribution of their principal amount (contributions) at any time, for any reason, and without penalty. Earnings in a Roth IRA are withdrawn after age 59.5 tax-free as well, as long as certain conditions are met, and may also be withdrawn tax-free before that age under certain circumstances. There are no required distributions and no restriction on investing by age.

An “education IRA” is the prior but still commonly used term for a Coverdell Education Savings Account. Within income limits, it allows an individual to make a nondeductible contribution on behalf of a child (younger than 18) of up to $2,000 per year. The sole purpose is to save for a child’s education expenses. This includes qualifying educational expenses for nursery school, parochial and private school grades 1 to 12, as well as for post-high school educational expenses.

Although not formally an IRA, a Simplified Employee Pension plan is sometimes referred to as a SEP IRA. These accounts are most commonly used by those who are employed in second jobs or have businesses on the side. Similarly, a Savings Incentive Match Plan for Employees, sometimes called a SIMPLE IRA, may be available to those who have additional employment.

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