Are There Two Types of IRA?
An Individual Retirement Account, or IRA, can help you save for retirement and reduce taxes right now – there are various types with differing structures and income limits to consider when choosing one.
You can open an IRA at many financial institutions, including brokerage firms, banks and credit unions. When researching fees, minimum opening requirements and management costs before choosing your provider.
Traditional IRAs allow anyone with earned income to invest money tax-free. They’re an excellent way to build long-term wealth while deferring taxes for growth potential. Withdrawals will only be subject to current income tax after age 59 1/2; however, you may make penalty-free withdrawals before this age in certain instances, such as buying your first home or medical expenses.
Traditional IRAs are an excellent complement to employer-sponsored retirement plans like 401(k)s and other workplace retirement savings accounts. At Thrivent Financial Advisors, our Financial Advisors can assist in evaluating your options and selecting an account type appropriate to you, as well as help estimate retirement needs and plan accordingly.
Roth IRAs may be an attractive option for retirees expecting to fall into higher tax brackets during retirement, as withdrawals from one are exempt from income taxes and early withdrawal penalties as long as certain criteria are met.
Compound interest will quickly build your investment balance when invested in a Roth IRA account; it’s essential that investors understand the difference between this type of account and traditional IRAs before beginning investment.
Roth IRAs can be opened through any of three avenues – online brokerage, robo-advisor or bank. When selecting an account provider, compare fees and minimum requirements before considering whether the firm provides free financial planning tools that can assist in setting and reaching savings goals.
SEP IRAs are ideal for small business owners as they typically don’t require start-up or annual fees and typically provide higher contribution limits than other retirement accounts.
Employers looking to establish a SEP IRA should execute a plan document outlining its details, including an allocation formula that applies the employer contributions equally across each eligible employee account. Usually this form 5035-SEP from IRS but other forms or formal agreement documents may also be used may also be acceptable.
Contributions to a SEP IRA may be invested in various mutual funds, equities, and bonds; however, unlike traditional IRAs and 401(k) plans, SEP IRAs do not permit catch-up contributions after age 50 – making them less suitable than their counterparts but providing higher contribution limits that might make SEP IRAs attractive options for business owners.
The SIMPLE IRA is an employee retirement plan that combines the tax advantages of traditional IRAs with payroll deductions for greater convenience. Both employees and employers can contribute up to 2% of each participant’s salary to this retirement account, which they can then invest into different mutual funds.
This plan is easier to set up and operate than other types, with lower startup and annual costs. For more information about it, refer to IRS Publication 560 Retirement Plans for Small Business.
To create a SIMPLE IRA, it’s necessary to select a financial institution that will accept contributions and offer administrative support. They should offer a selection of investments as well as updates each year; furthermore, participation may be restricted only to owners or certain employees within your business.
IRA for self-employed individuals
SEP IRAs are popular retirement savings options among self-employed individuals and small business owners, offering high contribution limits, low fees, and easy administration. While flexible than other employer plans (for instance allowing employees to contribute directly), SEP IRAs don’t permit contributions on behalf of employees directly and don’t include catch-up contributions like those found in a 401(k).
SEP IRAs require employers to contribute pretax contributions, potentially moving a business or its employees into higher tax brackets. Furthermore, SEP IRAs have required minimum distributions starting at age 73; when choosing an investment provider it’s wise to compare fees and minimum investments before making your choice. Furthermore, backdoor Roth IRAs might also be worth exploring as backdoor alternatives may offer better tax planning benefits if your income does not qualify for traditional Roth IRAs.
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