Individual Retirement Accounts

An Individual Retirement Account (IRA) provides some form of tax advantage to assets held by an individual until retirement, with certain exceptions. Despite the recent trend toward the use of the 401(k) and similar plans, the IRA is still a valuable tool for retirement planning and other goals. The types of IRAs are traditional, Roth, education, SEP, and SIMPLE; all of them use one of two forms of preferential tax treatments affecting contributions and gains. Individuals, small businesses, and the self-employed can all potentially use IRAs. The Internal Revenue Service (IRS) does not dictate the type of investment held in an IRA; investors can use stocks, bonds, mutual funds, and others (Preston). The investment choice should be determined by investment horizon, risk tolerance, and possibly investment savvy (Hanna and Chen).

The traditional IRA has been available for some time. The Roth IRA was born out of the 1997 Taxpayer Relief Act and provides a different tax advantage than other types of retirement savings vehicles, which will be discussed later. The 2001 Taxpayer Relief Act (2001 TRA) brought changes to contribution limits and will be in effect beginning in 2002. These changes will be highlighted where applicable.