Types of Traditional IRAs

Your Traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account.

Individual Retirement Account

An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.

• The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
• The trustee or custodian generally cannot accept contributions of more than $3,000 ($3,500 if you are 50 or older). However, rollover contributions and employer contributions to a simplified employee pension (SEP), can be more than this amount.
• Contributions, except for rollover contributions, must be in cash.
• You must have a nonforfeitable right to the amount at all times.
• Money in your account cannot be used to buy a life insurance policy.
• Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
• You must start receiving distributions by April 1 of the year following the year in which you reach age 70 and a half.

Individual Retirement Annuity

You can set up an individual retirement annuity by purchasing an annuity contract or an endowment contract from a life insurance company.

An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones who can receive the benefits or payments.

An individual retirement annuity must meet all the following requirements.

• Your entire interest in the contract must be nonforfeitable.
• The contract must provide that you cannot transfer any portion of it to any person other than the issuer.
• There must be flexible premiums so that if your compensation changes, your payment can also change. This provision applies to contracts issued after November 6, 1978.
• The contract must provide that contributions cannot be more than $3,000 ($3,500 if 50 or older), and that you must use any refunded premiums to pay for future premiums or to buy more benefits before the end of the calendar year after the year in which you receive the refund.
• Distributions must begin by April 1 of the year following the year in which you reach age 70 and a half.

Individual Retirement Bonds

The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982. The bonds have the following features.

• They stop earning interest when you reach age 70 and a half. If you die, interest will stop 5 years after your death, or on the date you would have reached age 70 and a half, whichever is earlier.
• You cannot transfer the bonds.

If you cash (redeem) the bonds before the year in which you reach age 59 and a half, you may be subject to a 10% additional tax. You can roll over redemption proceeds into IRAs.