What is an IRA
(Individual Retirement Account)?

An individual retirement account (IRA) is a type of retirement savings plan invested in financial products such as stocks, bonds or mutual funds. You can open some IRAs by yourself, like traditional and Roth IRAs. Alternatively, your employer can establish an IRA where employees make individual retirement account contributions, like a simplified employee pension (SEP) IRA or a savings incentive match plan (SIMPLE) IRA.

Jump to one of these retirement savings plan types:

Traditional | Roth | SEP Plan | SIMPLE IRA

Or learn about:

Inheriting IRAs | FAQs

 


What are the rules of an IRA?

All IRAs are alike in some ways, regardless of IRA contribution type. For example, an IRA can’t be jointly held; it’s for an individual. But you can still contribute to your spouse’s IRA if you have an income and your spouse does not.

IRAs are often referred to as “tax-advantaged investment vehicles.” But “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). By understanding these differences and the limits on these tax advantages, you can decide which type of IRA might be the best fit for you and be the best return on your retirement money.

With both traditional and Roth IRAs, you can save $6,000 per year, and up to $7,000 if you’re 50 or older. For a traditional IRA, your contributions are tax-deductible, and you owe no income taxes until you withdraw the funds. This could be an advantage if you’re in a high tax bracket today but expect to be in a lower one when retired. If you have a Roth IRA, your contributions aren’t tax-deductible, but you can withdraw money tax-free while retired.

Types of individual retirement accounts

IRAs come in a variety of styles to fit the retirement needs of different people. The types of IRAs include:

  • Traditional IRAs
  • Roth IRAs
  • IRAs for small businesses and the self-employed (SEP Plan and SIMPLE IRAs)

Each type varies according to how individual retirement account contributions are made and how they allow individual retirement account withdrawals. Different IRA interest rates can apply as well if you invest in IRA CDs.

Traditional IRAs

If you received taxable compensation during the year, you may be eligible to make individual retirement account contributions to a traditional IRA. A traditional IRA is a retirement account in which individuals can typically make pre-tax contributions up to a $6,000 per year, or $7,000 if you’re 50 or older (not including any catch-up contributions). You can also benefit from IRA interest rates if you invest in IRA CDs.

What about individual retirement account withdrawals? You can begin to withdraw the funds (without incurring a 10% early withdrawal fee, when you turn 59 ½. The latest you can begin taking distributions from your IRA is when you turn 70 ½.

Three advantages of a traditional IRA

When you’re considering a traditional IRA, here are 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 great year. You still don’t pay capital gains on it that year. Similarly, you won’t pay 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. As a result, the tax rate on your IRA payouts may also be lower. Note that we do not know what tax rates will be in the future.

Roth IRA

How is a Roth IRA similar to a traditional IRA? How is it different?

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

Because you’ve paid taxes on your contribution to the IRA upfront, you generally don’t pay taxes on the individual retirement account withdrawals you make from your Roth IRA in retirement.

Special IRAs, known as SEP Plans and SIMPLE IRAs, are also available for small businesses and self-employed individuals. If you have a SEP plan, your employer consistently pays nonelective contributions to you via the plan, whether or not you contributed anything. With a SIMPLE plan, your employer matches the contribution you pay in.

SEP Plan

A simplified employee pension (SEP) plan is a type of IRA that allows business owners to make tax-deductible individual retirement account contributions for their own and their employees’ retirement.

  • If you have an SEP IRA through your employer, while you own and control the plan, only your employer can contribute to it.
  • Consequently, you do not pay taxes on the contributions your employer makes.
  • However, you will pay taxes on the individual retirement account withdrawals you take from the account, plus any earnings made.

SIMPLE IRA

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

Type of IRA

Who can own

Tax-deductible contributions

Tax-free distribution

Age requirement for contributions

Required minimum distributions beginning at age 70 1/2

Early withdrawal penalties

Traditional IRA

Individual taxpayers and couples

Yes, but your deduction amounts are based on your income, filing status, and your retirement plan coverage that your employer provides

No

Contribute until age 70 1/2

Yes

Withdrawals before age 59 ½ might be subject to a 10% penalty

Roth IRA

Individual taxpayers and couples, subject to modified adjusted gross income (MAGI) limitations

No

Yes

Contribute at any age

No

Withdrawals before age 59 ½ might be subject to taxes on earnings with a 10% additional tax

SEP

Small business owners and the self-employed

Business deductions for employee contributions are limited to total contributions or 25% of employees’ compensation, whichever is less

If you’re self-employed, you must use a special formula to calculate the amount of contributions you can deduct

No

Contribute at any age while working

Yes

Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty, plus any applicable income taxes

SIMPLE

Small business owners and the self-employed

All contributions the plan owner makes to employees’ SIMPLE IRAs are tax-deductible

If you’re self-employed, you can also deduct contributions made to your SIMPLE IRA

No

Contribute at any age while working

Yes

Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty. Withdrawals within the first two years of participation are subject to a 25% penalty

Can someone inherit my IRA?

You can – and should – name a beneficiary of your IRA. But the specific rules of your IRA govern its inheritance by a beneficiary, and you should take heed of them before designating your beneficiary. Here are some things to consider ahead of time:

Rules when leaving your IRA to your spouse

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

Rules when leaving your IRA
to anyone other than your spouse

In this case, withdrawal rules get more complicated, but the important fact to remember is that individual retirement account withdrawals are required every year.

Think of an inherited IRA as a frozen account.

  • It can't be rolled over into another IRA.
  • No additional individual retirement account contributions can be made.
  • Despite the age of the beneficiary, he or she must make a withdrawal every year.

But there is one notable 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 is 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 it’s also protected from creditors.

IRA questions

General IRA

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

    Yes, but the combined amount being contributed to both types of accounts must not exceed that year's individual retirement account contribution limits.

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

    Yes, but they’ll be required to pay income taxes on the amount being converted in the year the conversion is completed. You can find the paperwork to convert a traditional IRA to a BlackRock Roth IRA 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 you’re 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 I already contributed for this year?

    If you made a contribution to a Roth IRA and then discover 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’re required to take the RMD from a traditional IRA beginning the year you turn 70 ½. If you’re a beneficiary of a deceased IRA owner, your options for taking distributions from an inherited IRA depends on whether the original IRA owner had begun their RMDs.

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

    An owner is never required to take RMDs from a Roth IRA as an individual retirement account withdrawal. However, if you’re 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?

    If you inherit a traditional IRA, the deadline for when you must take money out of it depends on whether the original IRA owner died before his or her required beginning date. That deadline is April 1 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 died on or after his or her required beginning date, you generally must take distributions in minimum amounts, based on your own or the original owner’s life expectancy.

    If you inherit 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 his or her own IRA. Different rules apply if the owner of the inherited IRA isn’t 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.

Explore more on retirement planning

When it comes to financial instruments suitable for your retirement planning, you’re not just restricted to IRAs. Learn more about additional options, in the form of 401(k)s and annuities.