History

• IRAs were first introduced by Congress in 1974. IRAs were intended as a tax-advantaged means for individuals who were not covered by an employer-based retirement program to contribute toward their own retirement. IRA programs have since expanded to include most taxpayers who have qualifying earned income.
  
  

Types

• There are three primary types of IRAs as of the 2009 tax year, including the traditional IRA, the Roth IRA and the SIMPLE IRA. Both traditional and Roth IRAs are set up by individual taxpayers, while SIMPLE IRAs are set up by employers for the benefit of their employees. Each type of IRA has specific rules regarding who can set one up, how to contribute and how to make withdrawals.
  
  

Time Frame

• Individuals who hold an IRA may begin withdrawing funds from their account once they reach 59 1/2 years of age. Funds withdrawn prior the account holder reaching 59 1/2 years are considered to be an early withdrawal, and are subject to ordinary income taxation in addition to a 10 percent tax penalty. This tax penalty also applies to Roth IRA contributions that have not been in the account for the required five tax-year periods. Individuals with a traditional IRA or SIMPLE IRA are required to begin taking distributions from their account in the year they attain 70 1/2 years of age. Roth IRA holders do not have an age requirement to begin withdrawals.
  
  

Exceptions

• IRA holders may take early distributions from their accounts without a tax penalty, provided the withdrawal is for specific purposes. Traditional and SIMPLE IRA holders may make penalty-free early withdrawals to cover certain non-reimbursed medical expenses, to pay for medical insurance while between jobs, to cover educational expenses, to purchase a first home, or in the event the IRA holder becomes disabled. Roth IRA holders may take a penalty-free early distribution to purchase a first home or as a result of disability. Funds from an IRA may pass to the beneficiaries in the event of the death of the account holder prior to reaching 59 1/2 years.
  
  

Considerations

• Traditional and SIMPLE IRAs are typically funded with pre-tax dollars. Distributions and withdrawals from these accounts are usually taxed as ordinary income in the tax year in which they were received. Roth IRA are typically funded with after-tax dollars. Distributions and withdrawals from these accounts are usually not taxed, according to IRS Publication 590, Individual Retirement Arrangements.