IRAs Part I – The Basics

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Jason A. Hendrix

Jason A. Hendrix



Jason Hendrix primarily focuses on assisting individuals and businesses with a variety of state tax matters, including Texas sales and use tax, Texas franchise tax, mixed beverage taxes, and motor vehicle taxes. He has several years of experience assisting clients involving disputes with the Texas Comptroller at all levels, including pre-audit, audit, administrative appeals, and collections. He also has experience assisting clients with matters involving the Texas Workforce Commission, as well as corporate matters, including formation and structuring, and federal tax matters.

Individuals have access to a wide variety of vehicles for investing hard-earned (or not-so-hard earned) money.  Some of these, including “individual retirement accounts” (or “IRAs”), provide potential benefits from a federal tax standpoint.

Over the next several weeks, I’ll be issuing a series of posts discussing IRAs in depth – general information, tax treatment, and some limitations and pitfalls.  For now, let’s dive into a few basics.

What is an IRA?

Generally speaking, an IRA is a tax-advantaged retirement account owned by an individual, either for his or her own benefit or for the benefit of a third-party (a “beneficiary”).  The Internal Revenue Code defines the term “individual retirement account” as follows:

A trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

(6)        Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained. [1]

The general idea is that an individual can place funds into an account that meets the above criteria, and can invest those funds on a tax-advantaged basis.  However, as noted above, the individual can only place a certain amount of funds into the IRA each year.

There’s another catch, too.  The specific tax advantages, however, depend on the type of IRA used.  Fortunately, there are only two: a “traditional” IRA, and a “Roth” IRA.

Traditional vs. Roth IRA

The term “Roth IRA” is defined by the Internal Revenue Code to mean:

An individual retirement plan (as defined in section 7701(a)(37)) which is designated…at the time of establishment of the plan as a Roth IRA. Such designation shall be made in such manner as the Secretary may prescribe. [2]

The term “individual retirement plan” is further defined to include an “individual retirement account” as defined in I.R.C. § 408(a), set forth above. [3]

Any IRA that is not a “Roth” IRA is, by default, a “traditional” IRA.

While both a “traditional” IRA and a “Roth” IRA are tax-advantaged retirement accounts, the actual tax advantages are entirely distinct.  A subsequent post will discuss the high-level implications of contributions to, and distributions from, these accounts.

[1] I.R.C. § 408(a).

[2] I.R.C. § 408A(b).

[3] I.R.C. § 7701(a)(37).