The IRA stands for Individual Retirement Account that you contribute on your own, and it has no connection with your employers' contributions to a retirement benefit in your name. Therefore, before contributing to IRAs, it is better to know the tax laws related to them. IRA, an investment tool, with some tax advantages for its investors and these advantages depend on the type of the investment the investor contributes. IRA has different tax rules for its contributors while payments on investments differ on the type of IRA account.
In 1974, under the Employee Retirement Income Security Act, the individual Retirement Accounts came to exist. Since then, a range of additional amendments were made such as increase of the limit of annual contributions, widening eligibility of Americans to participate with IRAs and more types of Individual Retirement Accounts.
These types of IRAs include Roth IRA, Traditional IRA, SEP IRA, Simple IRA and Simple Direct IRA. Contributions to Roth IRA are made after deducting the tax assets, the transactions made with the IRA are excluded from tax impacts and withdrawals can be made without a tax. Contribution for Traditional IRA is tax deductible. Earnings within this IRA are also excluded from tax impact. The withdrawals made when retiring is taxed as an income excluding some instances. In accordance with the type of contribution made, traditional IRA is called deductible IRAs or Non-deductible IRAs.
Although IRA refers to contributions that made on an individual basis, SEP IRA can be made by employers or employees. It is typically contributed by the self employers and the small business owners. Nevertheless, this type of IRA is tagged to the employee's name instead of the company's name thus converting them to Individual Retirement Accounts. Simple IRA though treated under IRA are categorized separately, as they are contributed both by employee and employers. They are with lower limits for contribution and easy to control. Self-Directed IRAs are permitted to be handled by the account holders making the investments.
Other than these IRAs, some sub types IRAs exist. They are Rollover IRA and Conduit IRA. They are under the current tax law. Functions of traditional IRAs are somewhat different to these new IRAs. The tax law that influences them set them to expire if they are not extended further. The Educational IRA which existed earlier is known now Coverdell Education Savings Account.
Under the Economic Growth and Tax Relief Reconciliation Act of year 2001, many restrictions that were prevalent for opening IRAs were relaxed. After this act, more Acts further eased the functions of IRAs. Under these new regulations, many retirement plans can be converted to IRAs under certain conditions.