History

• The first IRAs began in 1974 and allowed people to contribute $1,500 annually, which they would deduct from their taxable earnings. In 1986, the contribution limit rose to $2,000, and workers could contribute $250 a year to an IRA on behalf of an unemployed spouse. In 1997, congress approved the creation of Roth, SIMPLE, and Education IRAs. The contribution limits and income guidelines for IRAs are always subject to change, and the IRS announces new guidelines every year.
  
  

Benefits

• The main benefits of an IRA deal with taxation. As of 2010, individuals earning less than $56,000 and couples earning less than $89,000 annually can contribute up to $5,000 to tax-deferred traditional IRA accounts. The money is tax sheltered until withdrawals commence, at which time it is subject to ordinary income tax. SIMPLE and SEP IRAs work on the same premise. Roth IRAs contain after-tax money, and if no early withdrawals occur, the principal and interest are tax-free. Education IRAs are after-tax money, too, and enjoy preferential tax treatment when withdrawn for eligible expenses.
  
  

Time Frame

• Retirement accounts are for use after the owners reach age 59 ½ years of age. Withdrawals before that age incur 10 percent penalties and possible tax implications. People with traditional IRAs must start required minimum distributions no later than age 70 1/2. Education IRAs do not have age restrictions and can pass from one beneficiary to another if the original beneficiary does not need the funds.
  
  

Types

• Banks and other financial institutions give IRA account holders a variety of investment options. Regular bank savings accounts and certificates of deposit offer principal protection as long as balances do not exceed FDIC coverage limits. Many brokers recommend using aggressive mutual funds for IRA accounts when you will not use the money for 10 years or more. Mutual fund companies allow you to move funds from stock portfolios to more conservative bond funds as you near retirement or college age.
  
  

Considerations

• Many mutual fund companies assess annual custodial fees on IRA accounts. People with multiple IRAs can avoid fees by consolidating accounts. You cannot mix Roth IRA money and traditional IRA money without a Roth conversion, but merging identical account types saves money. IRA proceeds in conventional bank products enjoy FDIC protection, but only up to a maximum of $250,000 per individual, per bank. Moving excess funds to another bank enables account holders to increase FDIC coverage by another $250,000.