Individual Retirement Accounts

The term "IRA" is an acronym for a government sponsored personal retirement plan called an Individual Retirement Account. IRAs are tax-advantaged retirement programs for individuals with earned income.

In order to open an IRA, an individual must first establish an account with a bank, brokerage firm or mutual fund company. These firms then act in the capacity of a fiduciary. The individual is responsible for establishing the IRA and selecting the plan investments. Once the account has been established, the individual can contribute a maximum of several thousand dollars per year into an IRA (see the table below for exact contribution limits). The IRA plan, which was established in 1974 by Congress, has been an extremely popular retirement savings plan for workers for over forty years.

IRA Age 50 + Catch-Up:

Participants who are age 50 and over are eligible to make an additional annual contribution to their IRAs beginning in the year they turn 50. See below for details.

Annual Contribution Limit for IRAs:



50+ Limit














Taxes and Distributions:

Taxes on Traditional IRA contributions and earnings are deferred until the account owner takes a distribution from the IRA. When money is withdrawn from a Traditional IRA it is taxed as regular income. Withdrawals are typically made when or after the plan owner has reached the age of 59 1/2. If the plan owner withdraws money from the account prior to retirement age, then he/she will incur a 10% penalty payable to the IRS (unless specific circumstances apply).

IRA Investment Options:

IRA account owners can invest in stocks, bonds, CDs, and mutual funds, but some trustees also allow non-standard assets to be held in IRAs. Some of these non-standard assets include:

-- Real Estate
-- REITs
-- Futures
-- Options
-- U.S. minted gold and silver coins

According to figures from the Investment Company Institute trade group in Washington, D.C., U.S. investors had contributed an estimated $4.3 trillion to IRA accounts by year-end 2009.

An individual can withdraw penalty-free distributions from an IRA account as long as one of the following conditions applies:

-Reaches age 59 ½
-Separates from service in order to retire.
-Becomes disabled.
-Suffers financial hardship.

Any individual with earned income can establish an IRA. However, workers who are covered by employer-sponsored retirement plans are not able to take a tax deduction for their annual contribution unless their incomes fall below $71,000 for an individual, or $118,000 for a couple. You can no longer make contributions to a Traditional IRA after the age of 70 ½. However, there are no age restrictions associated with Roth IRAs.

Roth IRA:

Created in 1997 and named for the late Republican Senator William Roth Jr., the Roth IRA functions a little differently than the Traditional IRA. Since the Roth IRA is funded with after-tax contributions, there is no allowable tax deduction. However, retired individuals do not have to pay taxes when they take distributions from a Roth IRA. As such, Roth IRAs provide lifelong tax protection.

Difference between a Traditional IRA and a Roth IRA:

Traditional IRA Profile:

  • Tax deductible contributions (depending on income level)

  • Withdraws begin at age 59 1/2 and are mandatory by 70 1/2.

  • Taxes are paid on earnings when withdrawn from the IRA

  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)

  • Available to everyone; no income restrictions

  • All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception).

Roth IRA Profile:

  • Contributions are not tax deductible

  • No Mandatory Distribution Age

  • All earnings and principal are 100% tax free if rules and regulations are followed

  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)

  • Available only to single-filers making up to $116,000 or married couples making a combined maximum of $183,000 annually.

  • Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).


A Simplified Employee Pension Individual Retirement Account is a variation of the the individual retirement account used in the United States. 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 an SEP plan. Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA.

The SEP IRA is a retirement plan designed to benefit self employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.

SEP-IRA Contribution Limits:

In 2015 a SEP IRA has a contribution limit of $53,000, thereafter, the limit is subject to annual cost-of-living adjustments for later years. Note that contributions may be made to the plan up until the date that the employer's return is due for that year. Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

A SEP-IRA has broad appeal due to its high annual contribution limits, completely discretionary and flexible annual contributions and minimal administration. SEP IRA plans can be established by a one-person business or by a business owner with employees. For employees, the employer may contribute up to 25% of the employee's wages to the employee's SEP-IRA account. For example, if an employee earns $40,000 in wages, the employer could contribute up to $10,000 to the SEP-IRA account because 25% of $40,000 equals $10,000.

Deadline for Establishment and Contributions is the filing deadline for employer's tax return, including extensions.
Employee eligibility conditions may not be any more strict than (i.e. can be less strict):

  1. be at least 21 years of age

  2. has worked for the employer for at least three of the previous five years, and received at least $550 in compensation for the tax year

  3. must be eligible for the employer's SEP-IRA plan.

SEP-IRA funds are taxed at ordinary income tax rates when qualified withdrawals are taken after age 59 1/2 (the same rule as for traditional IRAs). Contributions to an SEP plan are deductible: they will lower a taxpayer's income tax liability in the current year.

* Information contained in these sections merely highlights some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.

Coverdell Educational Accounts (ESAs):

Coverdell Educational Accounts (ESAs):
Back when it was the Education IRA, it was not too popular (despite the lure of tax-free income). In 2002, however, the re-named Coverdell education savings account became a very attractive college savings vehicle for many people, including families that wish to save for elementary and secondary school expenses. In fact, even if you like the 529 plan you may still decide to contribute the first $2,000 of savings for each child into a Coverdell account. There are some items to be aware of, however, such as the following:

There are certain eligibility requirements in the year you wish to contribute to the ESA, which means that not everyone will find them useful. For example, tax law prohibits ESA funding once the beneficiary reaches age 18.

In 2002, the contribution limit was increased from $500 per child to the much more reasonable level of $2,000. However, you need to be careful when accounts are established by different family members for the same child. If total contributions exceed $2,000 in a year, a penalty will be owed.

The relatively low contribution limit means that even a small annual maintenance fee charged by the financial institution holding your ESA could significantly affect your overall investment return.

Your contribution goes into an account that will eventually be distributed to your child if not used for college. You cannot simply refund the account back to yourself like you can with most 529 plans. This means you lose some degree of control.

The ESA is on equal footing with the 529 plan when applying for federal financial aid. The account is considered an asset of the account custodian, typically the parent. Withdrawals are not reported as student or parent income as long as it is tax-free for federal income taxes.

Coordinating withdrawals with other tax benefits, especially the Hope or Lifetime Learning credits, can be tricky.

The account must be fully withdrawn by the time the beneficiary reaches age 30, or else it will be subject to tax and penalties.

 Individual Retirement Account Conversions:

This is a reportable movement of assets from a Traditional, SEP or SIMPLE IRA to a Roth IRA. The movement of assets may be taxable.

A conversion may be accomplished by a rollover of assets directly between the trustees of the Traditional and Roth IRAs, or by the IRA owner distributing the assets from the Traditional, SEP or SIMPLE IRA and rolling over the amount to the Roth IRA within 60-days of receiving the distributed amount.

G. W. Sherwold Associates, Inc. will advise you regarding potential conversion opportunities as they relate to your overall financial picture.

Contact Us

22994 El Toro Road
Lake Forest, CA 92630
Phone: (949) 470-0700
Toll Free: (800) SHERWOLD
Fax: (949) 470-0707


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