Source: IRS.gov – Issue Number: Tax Tip 2020-129
Terms to help taxpayers better understand Individual Retirement Arrangements
Many taxpayers may have heard of Individual Retirement Arrangements, or IRAs, but some don’t know how IRAs help them save for retirement.
People can set up an IRA with a bank or other financial institution, a life insurance company, mutual fund or stockbroker. Here’s a list of basic terms to help people better understand their IRA options.
- Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA.
- Distribution. The amount that someone withdraws from their IRA.
- Required distribution. There are requirements for withdrawing from an IRA:
- Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.
- Roth IRA. This type of IRA that is subject to the same rules as a traditional IRA but with certain exceptions:
- A taxpayer cannot deduct contributions to a Roth IRA.
- For some situations, qualified distributions are tax-free.
- Roth IRAs do not require withdrawals until after the death of the owner.
- Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
- Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.
- Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.
- Publication 560, Retirement Plans for Small Business
- Traditional and Roth IRAs Comparison Chart
- Publication 590-A, Contributions to Individual Retirement Arrangements
- Publication 590-B, Distributions from Individual Retirement Arrangements
- Retirement: Pensions, IRAs, Social Security
- Topic No. 412 Lump-Sum Distributions
- Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs
- Topic No. 413 Rollovers from Retirement Plans
- Topic No. 451 Individual Retirement Arrangements
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