These limits were adjusted upwards for 2016 to account for inflation. Under a traditional IRA, these contributions are tax deductible. All contributions, however, (whether initially tax deductible or not) can reap returns on a tax-deferred basis until retirement and withdrawal.

When you begin to withdraw at age 59 1/2, withdrawals from the IRA will be taxable. The great benefit of delaying this tax payment is belonging to a lower tax bracket in retirement. Once you reach age 70 ½, withdrawals from an IRA are mandatory. If your IRA contains different assets in it, you can choose which amount of what assets you wish to remove and when. Furthermore, an IRA is created solely for a single individual person. It is not associated with one’s employer or workplace.

IRAs can contain a wide variety of asset types and may be invested in any asset type that the custodian institution, such as a bank or brokerage, allows. Stocks, bonds, mutual funds and ETFs are some of the more common components of an IRA. But with a self-directed IRA, you can hold more types of assets, including precious metals and real estate. Due to their subjective values, collectibles, including antiques and collectible coins, and cash-value life insurance are prohibited from IRA inclusion.

Established by the Employee Retirement Income Security Act of 1974, about a third of Americans possess some type of IRA, according to the Investment Company Institute. IRAs accounted for the greatest share of retirement assets, totaling $7.3 trillion, compared to all defined contribution plans including 401(k)’s, totaling $6.7 trillion in the fourth quarter of 2015. With the decline of pensions and employer-provided plans, IRAs have become the most popular investment tool for managing one’s retirement.

The 3 Ways to Fund an IRA

1. Contribution

Most (not all) taxpayers are allowed to contribute $5,500-$6,500 maximum per year to their IRA (must be over 50 ½ years old to contribute over $5,500). This goes for traditional & Roth accounts only. Owners of SEP IRAs can contribute either 25% of earned income or $55,000 per year, whichever is less. Exceptions apply.

2. Rollover

Money can be withdrawn from one retirement plan and contributed to an IRA within 60 days of the initial withdrawal. This transaction is 100% tax-free and penalty-free. Money is sent from an old retirement plan directly to the individual account holder and they are responsible for contributing it to their new IRA within 60 days to avoid paying taxes. This is the most commonly used method for people with employer-sponsored retirement plans (401k, 403b, 457b). Generally, this can only be done one time per year, per account.

3. Trustee to Trustee (also known as Direct Transfer)

The individual account holder instructs that money be transferred directly from their current IRA trustee into a new IRA account. Money moves from one company (trustee) to another company (trustee) without the account holder having to take receipt of funds at any time. This type of transfer is 100% tax-free, IRS penalty-free and has no restrictions on the amount of transfers available.

**IMPORTANT: Transfers must be done from “like plan” to “like plan”. Pre-tax accounts get transferred to pre-tax accounts (Traditional and SEP accounts are interchangeable since they are both pre-tax), and post-tax accounts get transferred into post-tax accounts (only transfer Roth account into Roth account).

Withdrawing Money from an IRA

1. Withdrawing at Any Time

Money can be withdrawn from an IRA at any time – however, if a withdrawal is taken prior to reaching age 59 ½, a 10% federal penalty applies.

2. Indirect Rollovers

Indirect rollovers are tax-free, penalty-free withdrawal if completed within 60 days.