What is an IRA?

An individual retirement account (IRA) is a broad category of retirement savings plans. In fact, there are several different types of IRAs to consider. These include ones that individuals can open for themselves (like traditional and Roth IRAs), as well as ones that employers can set up for the benefit of their employees (like simplified employee pension (SEP) IRAs and savings incentive match plan (SIMPLE) IRAs).

 


Jump to one of these retirement savings plan types:

Traditional | Roth | SEP Plan | SIMPLE IRA

Or learn about:

Inheriting IRAs | FAQs

 


Regardless of type, however, there are a few similarities that all IRAs share. For example, an IRA cannot be jointly held (remember – the “I” stands for “individual”). But that’s not to say that you can’t necessarily contribute to your spouse’s IRA if you have an income and your spouse doesn’t.

In addition, IRAs are often referred to as “tax-advantaged investment vehicles.” But it’s important to note that “tax-advantaged” can mean a couple of different things, depending on the type of IRA. Some allow tax deductible contributions (the money you put into your IRA on an annual basis). Others allow tax-free distributions (the money you get out of the IRA). Understanding these differences, and even the limits on these tax advantages, can help you decide which type of IRA might be the best fit for you.


How do individual retirement accounts work?

Traditional IRA

If you received taxable compensation during the year, you may be eligble to make contributions to a traditional IRA. A traditional IRA is a retirement account in which individuals can typically make pre-tax contributions up to a specified maximum dollar amount (not including any catch-up contributions). You can begin to withdraw the funds, without incurring a 10% early withdrawal fee, when you turn 59 ½, and you must begin taking distributions from your IRA when you turn 70 ½.

Three advantages to remember:

  1. Making a contribution can potentially lower your annual taxable income. When you make a contribution to your traditional IRA, that money is contributed pre-tax, meaning it doesn’t count toward the income taxes you have to pay for the year.
  2. Your investments grow tax-deferred. Let’s say your IRA, which has underlying investments in stocks, bonds, and other assets, has a really good year. You still don’t pay capital gains on it that year. And similarly there’s no tax in the current year for any dividend income.
  3. You pay taxes only when you begin to receive distributions. Which, if you play your cards right, should be after you’re retired when your income is lower and, therefore, the tax rate on your IRA payouts may also be lower. Note that we don't know what tax rates will be in the future.

Roth IRA

Like a traditional IRA, a Roth IRA also provides tax-free growth on investments. However, unlike a traditional IRA, you can only contribute to a Roth IRA with after-tax dollars. In addition, your contribution amount might be limited based on your filing status and/or income.

But, because you’ve paid taxes on your contribution to the IRA up-front, generally you don’t pay taxes on the payouts you receive from your Roth IRA.

 


IRAs for small businesses
and the self-employed

SEP Plan

A simplified employee pension (SEP) plan is a kind of IRA that allows business owners to make tax-deductible contributions for their own and their employees’ retirement. If you have an SEP IRA through your employer, you own and control the plan, but only the employer contributes to it. As such, you don’t pay taxes on the contributions that your employer makes. But, you will pay taxes on the distributions you receive from the account, plus any earnings made.  

SIMPLE IRA

A savings incentive match plan for employees (SIMPLE) IRA is a retirement plan that small employers (think: fewer than 100 employees), including self-employed individuals, can set up. SIMPLE IRAs allow employees to contribute pre-tax dollars to the plan while requiring the employer to make either matching contributions (up to 3% of compensation) or nonelective contributions.  

The difference between the two is simple: Matching contributions are based on what the employee puts in, while nonelective contributions are consistently paid to employees regardless of whether or not they contributed anything.


Can someone inherit my IRA?

You can – and should – name a beneficiary of your IRA. Here are some things to consider ahead of time:

When leaving your IRA to your spouse

This can be very straightforward. Your spouse can take control of the assets as his or her own and follow the regular rules for making IRA withdrawals. But if your spouse is younger than 59 ½ years old, the age at which IRA early-withdrawal penalties subside, he or she may want to leave the inherited IRA intact and use the rules other beneficiaries must follow.

When leaving your IRA
to anyone other than your spouse

Withdrawal rules get more complicated in this case, but the basic thing to remember is that withdrawals are required every year.

Think of an inherited IRA as a frozen account. As such, it can't be rolled over into another IRA and no additional contributions can be made. In addition, no matter how old the beneficiary is, he or she must make a withdrawal every year.

There is, however, one noteable exception: If the IRA was inherited before the original owner reached age 70 ½, the beneficiary can choose to withdraw all the money within five years. However, the beneficiary would still owe any income tax due on the withdrawal.

Otherwise, the beneficiary can choose to stretch out the payouts by taking smaller annual distributions, called required minimum distributions (RMDs). The dollar amount of these RMDs are based on the beneficiary’s own life expectancy.

In addition to the control-factor, a trusteed IRA may offer a cost-advantage over establishing and maintaining a traditional trust and is also protected from creditors.


IRA FAQs

General IRA questions

  • Can investors have both a Roth IRA and a traditional IRA?

    Yes. However the combined amount being contributed to both types of accounts must not exceed that year's contribution limits.

  • Can owners of a traditional IRA convert it into a Roth IRA?

    Yes, owners of traditional IRAs can convert their traditional IRA into a Roth IRA. They will be required to pay income taxes on the amount being converted in the year the conversion is completed. Paperwork to convert their traditional IRA to a BlackRock Roth IRA can be found by downloading the Roth IRA Enrollment Kit.

  • How do I open an IRA with BlackRock?

    You can open a traditional, Rollover, Roth or SEP IRA (provided your eligible to establish one or your employer offers one) using the BlackRock IRA Application. In addition, you can open a SIMPLE IRA (provided your employer offers one) with the SIMPLE Plan Enrollment Kit.

  • What if I earn more than expected this year and no longer qualify for a Roth IRA but already made a contribution for this year?

    If you made a contribution to a Roth IRA, and then discover that your income will exceed the maximum allowed to contribute to a Roth IRA, the amount contributed that year can be re-characterized as a contribution to a traditional IRA or removed from the Roth as excess contribution by your tax filing deadline (including extensions).

IRA Withdrawals

  • Am I required to take money out of my traditional IRA?

    You are required to take the RMD from a traditional IRA beginning the year you turn 70 ½. For beneficiaries of a deceased IRA owner, whether or not the original IRA owner had begun their RMDs determines their options for taking distributions from an inherited IRA.

  • Am I required to take money out of my Roth IRA?

    An owner is never required to take RMDs from a Roth IRA. However, if you are the non-spouse beneficiary of a Roth IRA, you must either take the entire balance by the end of the fifth year after the original owner’s death or take distributions starting in the year after the original owner’s death in minimum amounts based on your own life expectancy.

  • Are beneficiaries required to take money out of their inherited IRA?

    Yes, if you inherit a traditional IRA, when you must take money out of it depends on whether the original IRA owner died before his or her required beginning date, the April 1 of the year following the year the original IRA owner turned or would have turned 70 ½. If the owner died before his or her required beginning date, you may either take the entire balance by the end of the fifth year after the original owner’s death or take distributions starting in the year after the original owner’s death in minimum amounts based on your own life expectancy. If the IRA owner dies on or after his or her required beginning date, you generally must take distributions in minimum amounts based on the longer of your own or the original owner’s life expectancy.

    If you are the beneficiary of a Roth IRA, you may either take the entire balance by the end of the fifth year after the original owner’s death or take distributions starting in the year after the original owner’s death in minimum amounts based on your own life expectancy.

    Keep in mind that a spouse can treat an IRA inherited from his or her spouse as her own IRA and that different rules apply if the owner of the inherited IRA is not an individual. For more information about when you must take money out of an inherited IRA, consult IRA Publication 590B, or consult a tax advisor.