What Are the 3 Types of IRAs?
Individual Retirement Accounts (IRAs) allow investors to make tax-deductible contributions and enjoy tax-deferred growth over time, in addition to offering numerous investment opportunities.
Navy Federal offers resources to help you maximize the use of tax-deferred investments like Individual Retirement Accounts (IRAs). Here are the 3 types of IRAs to consider:.
Traditional IRAs are individual retirement accounts that allow investment earnings to accumulate tax-deferred, so you only pay taxes when withdrawing funds in retirement. They’re an attractive choice for people without access to workplace retirement plans.
Traditional IRA contributions are eligible to be tax-deducted up to their annual contribution limit (in 2022, this limit is $61,000). Contributions may also be opened on behalf of your spouse as an “inherited IRA”, also referred to as “spousal IRA.”
After opening an IRA, your money can be invested in various assets like stocks, mutual funds and exchange-traded funds as well as real estate. There are numerous options available depending on your financial goals, age and level of management you prefer – most banks, credit unions and brokerage firms provide them and even offer professional guidance to assist with making wiser choices.
Roth IRAs offer distinctive tax benefits that make them attractive retirement savings accounts. You can withdraw earnings without paying income tax as long as the account has been held open for at least five years and you are age 59 1/2 or over, providing significant tax savings during retirement when tax brackets may be lower.
Nondeductible IRAs offer tax advantages that exceed those available through Roth IRAs, such as deferred growth and withdrawal penalties. It is important to remember, though, that any contributions you make annually to an IRA will be taxed as ordinary income when taken out later on.
Simplified Employee Pension Plan or SEP IRA is an excellent solution for small business owners and self-employed individuals looking to establish workplace retirement plans but cannot afford the startup costs and operational expenses associated with traditional plans. In contrast to a traditional IRA, SEP IRAs accept contributions from both employees and employers through payroll deduction, although contribution limits typically reach 25% of compensation or $69,000 depending on 2024 limits. When funds are withdrawn from an SEP IRA they generally incur taxes as well as an early withdrawal penalty of 10% in some instances; exceptions apply in certain instances.
Once an employee leaves an employer, their retirement savings may be transferred into an individual retirement account (IRA) at another financial institution – this process is known as rolling over.
Your funds may be invested into one or more traditional IRAs, Roth IRAs or Simplified Employee Pension IRAs – generally the latter two being more suitable for small business owners and self-employed individuals as they use pre-tax earnings for contributions while withdrawals will be taxed as income in retirement.
Assembling all your investments into one central location can make it simpler to track progress toward your retirement goals, reduce fees and identify inconsistencies that may hinder total returns, as well as identify and eliminate unnecessary returns that reduce total return potential.
Once you’ve decided where you’d like your IRA money invested, you can open an account at a bank, brokerage firm, mutual fund company, insurance company, or another financial institution. Your new account will be managed by professionals and can invest your money in CDs, bonds, mutual funds stocks or any other asset available on the market. Alternatively, you may choose more hands-on management by creating your own self-directed IRA; direct rollover or indirect, withdrawals incur income tax liability and an additional 10% penalty until age 59.5+5.
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