4 Types of IRAs to Consider

An IRA, also known as an Individual Retirement Account, is a type of savings account designed to help you prepare for retirement. There are several types of IRAs, including traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs. These accounts can also can include a variety of investments like stocks, bonds, or mutual funds that boost your retirement funds. Whether you’re an entry-level employee or a seasoned professional, it’s almost never too early or too late to invest in an IRA. These are the types of IRAs you should consider to make your transition to retirement easier.

1. Traditional IRAs

A traditional IRA is a type of tax deductible savings account. If you opt for a traditional IRA, you can expect any dividends, capital gains, and interest payments to build each year without being taxed. This allows your IRA to grow much more quickly.

Taxes are only applied to a traditional IRA when you withdraw after retirement; each withdrawal thereafter is considered taxable income by the IRS. Another caveat? As of 2016, if you make over $61,000 in income, the IRS may only allow a certain portion of your contributions to be deductible. If you make over $71,000, no amount is deductible, with the exception being if your employer doesn’t offer a retirement plan. Keep in mind that you must be under 70 ½ years old to contribute to a traditional IRA. You’ll also undergo a 10% federal penalty tax should you withdraw before 59 ½ years old.

2. Roth IRAs

This is another type popular retirement account. Roth IRAs aren’t tax deductible, but certain distributions are considered tax-free. Unlike traditional IRAs, you won’t be taxed when you withdraw after retirement because you’ve already contributed after-tax dollars. You also aren’t required to pay a capital gains tax, and you can contribute at any age.

3. SIMPLE IRAs

Also known as Savings Inventive Matched Plans for Employees, this savings plan is tax-deferred for self-employed individuals as well as employers. If you work for a business, the benefit to SIMPLE IRAs is that the employer must make contributions that match the employee’s. As a business, this may put you into a lower tax bracket, because each contribution is tax deductible.

4. SEP IRAs

The Simplified Employee Pension IRA is another option for self-employed workers, and also accommodates business of all sizes. Like SIMPLE IRAs, a small business owner can deduct all contributions from their business income to reach a lower tax bracket, but their contribution can’t exceed 25% of their employee’s income, or 20% for self-employed individuals. The major difference between SIMPLE IRAs and SEP IRAs is that employees can’t contribute to their own retirement accounts, which makes each withdrawal eligible to taxed income. Employers who provide SEP IRAs are required to offer an account to employees if they’re at least 21, have worked for an employer for at least three years, and have received at least $600 in compensation during the tax year.

How to Choose the Right IRA

It can be difficult to pick the right IRA, but a financial advisor can help you select the option that suits your lifestyle, income, and goals. Setting up a managed IRA with an advisor before retirement will better help you forge the path ahead and achieve your goals. Don’t stop thinking about your IRA after you retire; consider keeping a financial advisor on hand to answer any questions and help guide your financial future.

Investing in an IRA is one of the many ways you can build a strong foundation for your financial future. With the right help, you can live a comfortable life and cover your expenses during retirement with the help of a reverse mortgage application, for example. Inquire with your employer, consult a financial advisor or mortgage broker, and build your retirement account today.

 

Contributed by M. Frank with Images Used with Permission