What Type of IRA Should You Have?
As part of your search for an IRA, pay special attention to fees such as transaction costs and account minimums, as well as whether the firm offers a variety of no-transaction-fee ETFs and mutual funds with no transaction costs attached.
An Individual Retirement Account, or IRA, can be an excellent way to save for retirement if your workplace offers one. Learn about seven different kinds of IRA accounts including traditional, Roth, SEP and SIMPLE IRA accounts.
Traditional IRA
The traditional IRA provides tax breaks and deferred growth on investments for any person with earned income, whether your contributions come out pre-tax or post-tax dollars. Your money grows over time through compound interest investments with various risk-adjusted investments available – and when withdrawals occur in retirement you are subject to income taxes on them; it’s ideal for investors who expect themselves to remain in either their same or lower tax bracket than now when making withdrawals.
Other types of IRAs available to small business owners and self-employed individuals include SEP and SIMPLE IRAs, designed specifically to meet their needs. You may also open a self-directed IRA for more customized strategies; however, IRS regulations restrict it from holding certain types of assets like collectibles and life insurance policies. You’ll find plenty of investment firms and online brokerages offering IRAs; compare fees, commissions and minimum opening requirements before selecting one that best meets your requirements.
Roth IRA
Roth IRAs offer you an alternative method for paying taxes in retirement: upfront. This may be especially advantageous if your tax rate will increase from where it stands today.
Roth IRA annual contribution limits are typically determined by your earned income, with reduced (or phased out) contribution amounts once your earned income surpasses certain thresholds. But there’s an entirely legal way around these restrictions with backdoor Roth IRAs.
There are various brokerage firms that provide Roth IRA accounts, but some charge higher fees than others. When selecting an IRA provider, compare management fees, commissions and minimum opening requirements when making your decision. Also take into consideration educational resources available from each firm as well as flexibility with investments such as Betterment which ranks highly among robo-advisors as they allow investors to invest without an account minimum or purchasing full shares at once.
SEP IRA
SEP IRAs are employer-funded retirement plans that allow an employer to contribute a specific percentage of each eligible employee’s compensation into an individual IRA set up in their name, managed by an IRA trustee who will manage investments, send annual statements and file any required tax filings with the IRS. An employer determines who may participate based on factors like income or participation in another retirement plan.
SEP IRAs feature the same contribution limits as traditional IRAs but don’t provide an upfront tax break. Distributions in retirement will be taxed as ordinary income; and any early withdrawals could incur penalties, unless an exception applies.
Setting up and administering a SEP IRA is relatively straightforward. An employer completes Form 5305-SEP or another similar plan document and distributes it to each eligible employee; this document details contributions by employers, eligibility requirements, and an allocation formula.
SIMPLE IRA
The Savings Incentive Match Plan for Employees, or SIMPLE IRA, is an employer-sponsored retirement savings plan which allows both employees and employers to contribute a percentage of their paychecks directly into an account that accrues tax-deferred until withdrawal at retirement time. Often these types of plans have lower startup and operating costs than traditional 401(k) or SEP IRA plans.
Employers may make either a 3% matching contribution or non-elective contributions of either 2% or 3% for each participating employee’s account. Furthermore, participants in a SIMPLE IRA can move funds out to traditional IRAs or another employer-sponsored retirement plan at any point within two years after initially participating in it – though doing so within this two year window could incur a 25% penalty fee.
Self-employed individuals seeking retirement savings options may find that a SIMPLE IRA offers one of the best solutions. Following similar rules to traditional IRAs, but with some key differences:
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