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Understanding Individual Retirement Accounts Part II

by Bruce Haring

Individual Retirement Accounts (IRAs) are one of the most popular retirement planning products in the US. Consider this – StatisticsBrain states that out of all the retirement investments made until now by individual and financial services companies, around 25.4% of them are in different types of IRAs.

If you consider the overall wealth sheet for Americans, 8.5% of it is again invested into IRAs. In terms of absolute numbers, around $4.8 trillion are invested into IRAs by individuals and retirement planning organizations.

Retirement planning is crucial to ensure that your medical and personal needs are taken care of when you are unable to work. A recent survey by GoBankingRates indicates that every third American has zero savings towards retirement but how many of them have cable TV, too many pairs of shoes, and other things they do not need?

Of those who have some sort of savings, 56% of those have less than $10,000 meant for retirement. 72% of millennials either have absolutely nothing or less than $10,000 saved for their golden years. If you are in one of these above mentioned groups, it’s never too late to start saving, and you might find a suitable products among the one’s mentioned below.


SIMPLE IRA or Savings Incentive Match Plan for Employees is a form of Traditional SEP IRA used by various employers for their employees. Although this plan is also tax deferred, there are slight variations in this plan as compared to the normal SEP IRAs or the 401(k) & 403(B) plans.

In simple words, the SIMPLE IRA requires the employer to either match the contributions of the employee up to three percent of the employee’s compensation towards the IRA account or make a stack 2% contribution rate of the compensation with at-least $5,000 in a year. The second situation is undertaken irrespective of the amount of employee contribution.

Some features of the SIMPLE IRA worth noting are:

  1. The plan has lower contribution limits as compared to some other IRA plans.
  2. It is quite simpler in terms of administration. This leads to lower costs in handling procedures for this IRA account.
  • Rollover IRA

A rollover IRA is quite similar to the Traditional IRA. The tax implementations and treatment within and in transactions of the account are similar in both. The only difference being that the rollover IRA funds come from another qualified plan, such as 403 (b) plan. The funds are then rolled over into the rollover IRA instead of cash contributions being made to it.

It can be beneficially used by someone who already has an IRA sponsored by the previous employer and now wants the accumulated assets to grow more after leaving the organizations and/or retiring.

Some considerations in terms of the rollover IRA are:

  1. There can be no cash contributions made to a rollover IRA.
  2. No other types of assets can be commingled with a rollover IRA.

The rollover IRA is sometimes also known as the conduit IRA. The assets saved in the conduit IRA or rollover IRA remains tax deferred until they are withdrawn.

  • Self-Directed IRA

A self-directed IRA is a different form of retirement account provided by some financial institutions. Under a self-directed IRA, the customer is allowed to contribute towards the IRA in various different means apart from cash contributions. Certain types of contributions can be in the form of commodities such as real estate, oil, mortgages, etc.

All such assets can be accumulated and grown over a period of time just like cash contributions to provide a steady flow after retirement.

The self-directed IRA is governed by various conditions owing to its volatile nature and risk of fraud. Some of these considerations to be contemplated before investing in a self-directed IRA are:

  1. There must be a qualified custodian or trustee of the assets who will hold the assets on behalf of the IRA owner. All the administrative duties of the IRA account are performed by this custodian.
  2. The IRA custodians have the authority to restrict the type of assets they will handle on behalf of the owner along with the restrictions imposed by the internal revenue code.

Just like mutual funds and other financial products, IRAs of different types are designed so that individuals can choose a suitable product based on their own requirements. What works well for someone may not be the right kind of IRA for you. It is thus necessary to consult a financial consultant before you choose a specific type of IRA. Since retirement goals vary from person to person, there should be different products for different financial circumstances.


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