Individual Retirement Arrangement

Individual Retirement Plan

A Retirement Plan is a financial arrangement designed to replace employment income upon retirement.  These plans can be set up by employers, insurance companies, trade unions, the government or other institutions.

Congress has expressed a desire to encourage responsible planning by granting favorable tax treatment to a wide variety of plans.

An Individual Retirement Account is a type of “individual retirement arrangement”.  The term IRA is used to describe the Individual Retirement Accounts and the broader category of individual retirement arrangements, encompasses an individual retirement account, a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries, and an individual retirement annuity by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.

There are several types of IRA contributions:  Traditional IRA, ROTH IRA, Sep IRA, Rollover IRA and Conduit IRA.  The later 2 types are less popular under the current tax laws.

Individual Retirement Arrangements were introduced in 1974 with the enactment of the Employee Retirement Income Security Account (ERISA).  Taxpayers could contribute up to 15% of their annual income or $1500, whichever is less, each year and reduce their taxable income by the amount of their contributions.

The contributions could be invested in a special United States bond paying 6% interest, annuities that begin paying upon reaching age 59 1/2, or a trust maintained by a bank or insurance company.