Types of Individual Retirement Accounts
IRAs can be an invaluable financial asset, particularly for individuals without access to a workplace retirement plan. Investments within an IRA grow tax-deferred until you withdraw them.
An important thing to keep in mind when investing in an IRA is the length of its term; any withdrawal before age 59 1/2 incurs a penalty fee (in addition to taxes owed).
Traditional IRA
A Traditional IRA is the archetypical type of individual retirement account. Your contributions are tax deductible, while any gains aren’t subject to taxes until withdrawn in retirement. Like other IRAs, this one allows you to invest in stocks, bonds, mutual funds and ETFs – although taking any early distributions before age 59 1/2 could incur taxes as well as an IRS penalty of 10%.
Traditional IRAs offer a good solution for individuals without workplace plans, or who have already maxed out their 401(k), who want to continue saving pre-tax dollars. Furthermore, it may also help people who have changed jobs and need to roll over their previous employer’s plan into one with annual contribution limits and required minimum distributions that best suits your investment style – choose either investing yourself through an online broker or opt for automated management with robo-advisors as these accounts typically manage your account on your behalf.
Roth IRA
Roth IRAs allow you to contribute after-tax dollars and earn tax-free investment earnings under certain conditions, while providing flexibility of withdrawing contributions at any time without taxes or penalties (though earnings will be taxed before age 59 1/2 unless used for qualifying expenses such as home purchase, education expenses, uninsured medical costs or disability/death).
Roth contributions may appeal to people who anticipate paying higher income tax rates after retirement; Roth contributions allow them to reduce their adjusted gross income (AGI) in the year of making contributions, providing protection from increased future rates. Furthermore, those expecting their taxable income to decrease can benefit from Roth contributions by lowering their AGI during this year when making the contribution.
Rollover IRA
Rollover IRAs are used to transfer assets between pre-tax retirement accounts. This practice is often utilized when people change jobs while still wanting to maintain the same investment strategy.
Typically, the best choice for moving funds into an IRA is direct rollover; that way the funds will grow tax-deferred until you withdraw them at retirement time. You could also choose indirect rollover, in which your former employer sends you a check for distribution which you have 60 days to deposit into a pre-tax IRA account.
No matter which option you decide, it’s essential that you consult a financial expert in order to understand its federal income tax ramifications. Voya’s experts can assist in helping you compare options and make an informed decision that’s tailored to you and your unique circumstances.
Simplified Employee Pension (SEP) IRA
SEP IRAs are similar to traditional IRAs in that the contributions you make as an employer are tax-deductible and earnings accumulate tax-deferred until withdrawal. Employees can transfer their SEP IRA funds without incurring taxes or penalties into another qualified account without incurring penalties; however, some restrictions exist; SEP IRAs must abide by similar rules regarding investments, distributions and rollovers as traditional IRAs.
Contrary to 401(k), SEP IRA contributions do not depend on payroll deduction; you can contribute up to 25% of employees’ compensation or $66,000 or $69,000 depending on when they started working at your organization, respectively.
SEP IRAs provide small businesses and self-employed individuals with a straightforward means of saving for retirement, with low fees and administrative costs than other employer-sponsored plans. SEP IRAs can be set up with most brokerage firms; make sure you compare options, minimum investments and fees before opening one!
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