IRA Basics

• IRAs are retirement savings accounts that have tax advantages in order to encourage people to contribute to their retirement. All IRAs allow money to grow tax-deferred inside of the account. All IRAs consider withdrawals made prior to age 59 1/2 to be early withdrawals. Early withdrawals are typically subject to a 10 percent tax penalty.
  
  

IRA Types

• There are several types of IRA accounts. Traditional IRAs and Roth IRAs are personal accounts. These accounts may only be established by individuals. Contributions to these IRA accounts may only be made by the account owner, with the exception of spousal IRAs. A spousal IRA allows a spouse with income to contribute to the other spouse's IRA.
  
  SEP-IRAs and SIMPLE IRAs are for use by small businesses. Although the IRA accounts are still individual accounts and fully owned and controlled by the employee, they exist under the umbrella of the small business plan. With these plans employers may contribute to the employee's IRA.
  
  

SEP-IRA

• The simplified employee pension plan is a small business retirement plan. A SEP is established by the employer. A formal written agreement is required to establish a SEP. In 2011, the employer may contribute up to 25 percent of the employee's compensation up to a maximum of $49,000 annually. Employees may not contribute via the SEP. However, if the plan allows it, employee may make a standard IRA contribution of up to $5,000 into their own SEP-IRA, or up to $6,000 if the employee is over age 50.
  
  

SIMPLE IRA

• A SIMPLE IRA is a small business retirement plan limited to companies with no more than 100 employees who earned $5,000 or more in compensation. Employees may contribute to the SIMPLE IRA plan via salary deferral. The employee may contribute up to $11,500 each year for 2011. Employees 50 and over may make an additional catch-up contribution of $2,500 annually for a total contribution of $14,000 per year. Contributions made by the employee to a SIMPLE IRA do not count toward the annual contribution limit for traditional or Roth IRAs.
  
  The employer may contribute to the employee's IRA by either matching the employee contribution up to 3 percent, or by making a non-matching contribution of 2 percent. Compensation for matching purposes is limited to $245,000 in 2011.