Your Guide On IRA Plans Comparison

Generally, in a corporation any individual has a responsibility to save part of his income to secure his future. But as there is heavy tax assessment on personal income, the rate of savings is low. Thus, in the 1970s through parliamentary legislation, there was an arrangement made by the government to provide a special treatment in the tax code. IRA has a special status in the code of the IRS. This special treatment shelters the funds accumulated under IRA from tax assessment.

The first arrangement that came under this scheme is now known as Traditional IRA. Under this retirement plan, all earning individuals could contribute a certain amount to an IRA account each year. The interest earned is exempted from taxation. Unless the amount is withdrawn from the account no taxation is laid. The interest calculation is done on compound principle basis, which results in large funds. However, the tax bracket in which the person's earning is assessed and if he retires in the same tax bracket, the withdrawn amount will also be assessed on that basis only. This would give maximum benefit to the individual.

There is a set limit to the amount of contribution to your IRA account. You can contribute up to $4,000 in a fiscal year. For those who are above 50 years of age, they are allowed a $1000 extra to their annual contribution. Other versions of this schemes are SEP IRA, ROTH IRA, ROLLOVER IRA which cater to different saving situations. The primary purpose of all these plans is to provide tax-deferred growth of money.

The SEP IRA plan stands for Simplified Employee Pension. It is an employer sponsored plan for the employees and can be availed by the employer too, provided he fulfills the limit of 100 employees. Contribution to this kind of IRA account is limited to $41,000 or 25 percent of the gross adjusted income.

The Roth IRA has been the most preferred IRA since it was launched in 1997. This plan has the reverse rule of allowing tax deducted contributions and making withdrawal tax free. Above that a Roth IRA account also need not be distributed at the age of 70.5 of the account holder. But there is an income slab of eligibility of $110,000 for single individuals and $156,000 for earning couples. This arrangement has made much of the earning population to open up Roth IRA accounts just after attaining their legal age.

A ROLLOVER IRA is like an emergency tax shelter. If an individual is moving to a new job or has retired early, then he would not like to deprive his growing funds of tax shelter. Also, he would like to keep that fund separate from the annual contribution that he makes to the IRA in the new workplace.  ROLLOVER IRA caters to this situation. This is an account which allows all the benefits under the IRA scheme and is distributed by the age of 70.5 years of the employee.

All IRA accounts operate with the financial institution that is authorized by the IRS. Within the various schemes the most beneficial is Roth IRA which allows you to avail of it right after 18 years of age. You can always open other IRAs later on. This way there is optimum accumulation of funds. Even compared to 401 (k) plan it has the advantage of carrying on contribution after 70.5 years too. Thus a comparison of an IRA makes the point obvious that it is an efficient wealth building tool for regular earners as well.