When you set up an individual retirement account, you must decide how to invest your money. Your options include stocks, bonds, mutual funds and certificates of deposit. An IRA matures when the investment within it reaches its expiration date. However, your IRA can remain active long after your initial investment reaches maturity.
Most mutual funds are open-ended, which means you can redeem your shares at any time, but your shares do not have a set end date. Likewise, stocks remain active unless the company that issued the stocks goes bankrupt. In contrast, annuities, bonds and certificates of deposit have set terms. The term may last for months or years. You earn interest throughout the term, up until the account reaches maturity. Unit investment trusts are investment pools that also have expiration dates. A UIT works similarly to a mutual fund, because it contains a wide variety of securities such as stocks and bonds. However, UITs are not open-ended, so the investment manager liquidates the fund at a pre-set termination date.
Your IRA investments are held within an IRA holding account. The account serves to separate your retirement assets from your taxable accounts. When a UIT or bond reaches maturity, the bond issuer or fund manager liquidates your holdings and deposits cash into your account. Some CDs work similarly, while others are automatically renewable. At maturity, you typically have a seven- to 10-day grace period to make withdrawals before your CD rolls over into a new fixed term. Some annuities have a rollover option, while others annuitize at maturity. This means your contract converts into an income stream, and you begin to receive monthly income payments.
You normally fund an IRA on a tax-deferred basis, which means you pay income tax on your withdrawals. You do not have to pay taxes on any contributions that you made on an after-tax basis. You generally pay a 10 percent tax penalty if you make IRA withdrawals before reaching age 59 1/2. You cannot avoid paying any applicable taxes and penalties if your IRA annuity enters the payout phase. In contrast, liquidated funds from matured CDs, bonds and UITs remain sheltered from taxes unless you close your IRA holding account. You can use the money to invest in another security within the IRA or roll the cash to another retirement account.
Roth IRA contributions are not tax deductible. Consequently, you can withdraw your principal when your account reaches maturity. You do not have to pay taxes on your earnings as long as you hold the account for a minimum of five years and wait until you are 59 1/2 before making withdrawals. If you do not meet these conditions, you pay income tax on withdrawals of earnings and a 10 percent tax penalty. Certain exceptions apply to the 10 percent penalty on both Roth and traditional IRAs. These include withdrawals to fund a home purchase, school expenses and medical costs.
- Internal Revenue Service: Publication 590 (2012), Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: Retirement Topics - Distributions (when, how much)
- Federal Deposit Insurance Corporation: Certificates of Deposit: Tips for Savers
- Oklahoma Insurance Commissioner: Choosing your Annuity
- U.S. Securities and Exchange Commission: Bonds
- U.S. Securities and Exchange Commission: Unit Investment Trusts (UITs)
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