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Individual Retirement Account (IRA)

11/28/2017
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Individual Retirement Account (IRA)



Legal basis for IRAs

The individual retirement account and related vehicles were created by amendments to the Internal Revenue Code made by the Employee Retirement Income Security Act of 1974 (ERISA), which enacted (among other things) Internal Revenue Code sections 219 (26 U.S.C. § 219) and 408 (26 U.S.C. § 408) relating to IRAs.

Kinds of IRAs


There are a number of different types of IRAs, some being employer provided plans and others usually only being set up by an individual. The types include:

Roth IRA - money is taxed before deposit, and then accumulates tax-free on the earnings, and can be withdrawn tax-free. Named for William Roth.

Traditional IRA - money is deposited before tax, money accumulates tax free on earnings until withdrawn at retirement, at which point the money is taxed.

SEP IRA - a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee's name, instead of to a pension fund account in the company's name.

SIMPLE IRA - A simplified employee pension plan that allows both employer and employee contributions, similar to a 401(k), but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately.
 

Funding an IRA

IRAs can be funded with most types of securities, and some non security financial instruments. There are a few things that cannot be funded into an IRA. They include collectibles including valuable coins or bullion and life insurance. IRAs cannot generally hold real estate unless it is held as a form of security such as a real estate investment trust (REIT), or if the IRA is held by a custodian who makes all transactions. There are certain special restrictions on real estate held in an IRA.


Status of IRAs in bankruptcy

In the case of Rousey v. Jacoway, the United States Supreme Court ruled unanimously on April 4, 2005 that under section 522(d)(10)(E) of the U.S. Bankruptcy Code (11 U.S.C. § 522(d)(10)(E)), a debtor in bankruptcy can exempt his or her IRA from the bankruptcy estate. The Court indicated that because rights to withdrawals are based on age, IRAs should receive the same protection as other retirement plans.

Thirty-four states already had laws effectively allowing an individual to exempt an IRA in bankruptcy, but the Supreme Court decision allows federal protection for IRAs.

IRAs and borrowing

Borrowing against IRAs is generally not allowed. However the rules regarding IRAs allow assets in them to be transferred from one account to another. This can be used to temporarily "borrow" money from the IRA, once per year. The money must be placed in another IRA account within 60 days to qualify as an "indirect rollover" and avoid taxes and penalties.

IRA Definitions

Subsection (a) of Code section 408 defines the term individual retirement account and subsection (b) defines the term individual retirement annuity. Individual retirement accounts and individual retirement annuities are collectively referred to as individual retirement plans (see Internal Revenue Code section 7701(a)(37)). Individual retirement accounts and individual retirement annuities are also collectively referred to as individual retirement "arrangements" under certain Treasury regulations (e.g., 26 C.F.R. sec. 1.408-4 and sec. 1.408-6) and in Publication 590 (2004) from the Internal Revenue Service.

The term "arrangement" also has more limited meanings. Under subsection (k) of section 408, a simplified employee pension (or SEP) is a particular kind of individual retirement account or individual retirement annuity. A SEP may contain a section 408(k)(6) “arrangement.” Simple retirement accounts with qualified salary reduction “arrangements” are allowed by subsection (p) of section 408.

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