Individual Retirement Account: A retirement plan that allows you to contribute a limited yearly sum toward your retirement; taxes on the interest earned in the account are deferred. The contributions and earnings are taxable as income only when withdrawn or paid out after retirement. Investors can establish IRAs through a number of financial institutions, including insurance companies.
Similar in many ways to the Traditional IRA. A Roth IRA's main advantage is its tax structure. Contributions are made only from earned income that has already been taxed (and is not tax deductible), but withdrawals up to the total of contributions are federal income tax free, and withdrawals of earnings (anything above the total of contributions) are often free of federal income tax. Depending on with whom a Roth IRA is set up, it can be managed in creative ways, including investments in non-typical assets (Self-Directed IRA).
Named after a section of the 1978 Internal Revenue Code, a 401(k) is an employer-sponsored qualified retirement savings plan. A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested.
The "Savings Incentive Matching Plan for Employees." SIMPLE IRAs are Individual Retirement Annuities funded with employee elected salary deferrals and matching or nonelective employer contributions. Suited for small businesses with less than 100 employees earning $5,000 or more in the previous calendar year and the same or greater anticipated earnings for the current calendar year. It is similar to more well know plans such as the 401(k) and 403(b) (also known as TSA plans), but offers simpler and less costly administration rules.
A "Simplified Employee Pension Individual Retirement Account" is a variation of the Individual Retirement Account. Even more so than the SIMPLE IRA, the SEP-IRA really is "simple." There are no real administration costs if you are self-employed and don't have any employees. If you do have employees, all employees must receive the same benefits under a SEP plan. Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA. Contributions to a SEP plan are deductible: they will lower a taxpayer's income tax liability in the current year.