A traditional Individual Retirement Account (IRA) is a tax-advantaged savings account that is established and funded by an individual to accumulate retirement savings. A traditional IRA is generally funded through tax-deductible annual contributions and rollovers of pre-tax assets from other eligible retirement plans, such as 401(k) plans.
A traditional IRA is easy to establish and provides the account owner with flexibility and control over their contributions, investments, and distributions. Annual retirement savings contributions may be tax-deductible and investment earnings generally grow tax-deferred.
A Roth Individual Retirement Account (Roth IRA) is a tax-advantaged savings account that is established and funded by an individual to accumulate retirement savings. A Roth IRA is generally funded through after-tax annual contributions and rollovers from other eligible retirement plans, such as 401(k) plans.
A Roth IRA is easy to establish and provides the account owner with flexibility and control over their contributions, investments, and distributions. Roth IRAs can be established at any time, but contributions to the IRA are limited by earned income.
An Inherited Individual Retirement Account (IRA) is a tax-advantaged savings account funded with retirement savings inherited from a deceased individual.
Federal tax laws require that an inherited account owner distribute the entire account within a certain amount of time. An inherited IRA allows you to leave the assets in the IRA to grow tax-deferred for as long as the rules permit. The length of time varies according to the beneficiary’s relationship with the original account owner (spouse, non-spouse, legal entity) and age of the original account owner. Inherited IRAs cannot be combined with other personal IRAs.
While not a formal IRS-authorized Individual Retirement Account (IRA) option, many financial professionals use the term ‘rollover IRA’ to describe an IRA funded with savings that had been accumulated in employer-sponsored retirement plans, such as 401(k) plans, 403(b) plans and governmental 457(b) plans, or other IRAs.
A rollover IRA is established either as a traditional IRA or a Roth IRA and enjoys all the same tax benefits, including tax-deferred investment growth, as an IRA funded with annual contributions.
Automatic Rollover IRA
The Automatic Rollover provisions in a qualified retirement plan allow plan sponsors to transfer terminated participant accounts with small balances into IRAs. This non-taxable distribution from the plan lets the plan sponsor migrate accounts that can cause administrative burdens and increase plan costs.
Automatic rollovers typically occur when a plan participant account has less than $5,000 and the participant is no longer employed with the company. The retirement plan sponsor will notify eligible participants about the pending automatic rollover and provide them with the appropriate instructions for accessing the IRA through the IRA custodian. The participant (now IRA account owner) must make any further investment decisions or account changes through the IRA custodian.
Employee Benefit Plan Individually Directed Account
An Individually Directed Account (IDA) may be established as part of a diversified investment strategy within an employer-sponsored retirement benefit plan. The retirement plan allows employees to defer portions of their salaries to a tax-deferred account as a way to save for retirement. These contributions are done easily through monthly payroll deductions.
Defined benefit plans (and some defined contribution plans, too) typically make all the investment decisions for the plan’s assets (trustee directed), while defined contribution plans frequently provide a small group of predetermined investment options for the participants to choose the allocation (participant directed). Sometimes, these plans allow the participants to exercise independent control over the investment decisions (Individually Directed Account). Contact your employer plan administrator to determine eligibility.
IDAs allow plan participants to utilize alternative investment options not offered in many plans.