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What is an IRA?An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. Types of IRAsThere are a number of different types of IRAs which may be either employer provided plans and self-provided plans. The types include:
Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts made some further relaxations of restrictions. Essentially most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. |
An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA is a prohibited transaction and disqualifies the IRA from its beneficial tax treatment. (Of course, rollovers, transfers, and conversions between IRAs and other retirement accounts can include any asset.)
Once an IRA is funded, you should try to maximize your earnings rate with the least acceptable risk. The following banks currently offer some of the highest savings rates for both regular and IRA accounts:
Once money is inside an IRA, the IRA owner can direct the custodian to use the cash to purchase most types of securities, and some non security financial instruments. Some assets cannot be held in an IRA such as collectibles (e.g. art, baseball cards, and rare coins) and life insurance. The IRS does not approve any investment for an IRA.
Most IRA custodians limit available investments and do not permit real estate in an IRA unless it is held indirectly via a security such as a real estate investment trust (REIT). True self-directed IRA custodians/administrators permit real estate and other non-traditional assets. They may be found via a web search. They typically charge fees based on asset values. There are certain special restrictions on real estate held in an IRA (the IRA owner cannot benefit from the property in any way, i.e. they can not use it).
For individuals overseeing their own IRA investments, professional stock advice may be beneficial. Seasoned investors such as Peter Lynch and Warren Buffett recommend subscribing to Value Line to help beat the markets:
An IRA may borrow money but any loan must not be secured by the owner of the IRA. Also, the owner of the IRA may not pledge the IRA as security against a debt.
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It is a prohibited transaction for the IRA owner to borrow money from the IRA. Such a transaction disqualifies the IRA from special tax treatment. An IRA may be able to incur debt or borrow money secured by its assets but the IRA owner may not guarantee or secure the loan personally. Income from debt financed property in an IRA may generate unrelated business taxable income in the IRA.
The rules regarding IRA rollovers and transfers allow the IRA owner to perform an "indirect rollover" to another IRA. 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, or the transaction will be deemed an early withdrawal (subject to the appropriate withdrawal taxes and penalties) and may not be replaced.
If you're tight on cash and looking for low-cost loan alternatives, we strongly recommend one of the following proven programs before borrowing from your IRA: