Which Type of IRA is Best?
IRAs are one of the easiest and most tax-advantaged ways to save for retirement, but choosing which type is the best may come down to your anticipated tax rates when retiring.
Traditional IRAs allow income to accumulate tax-deferred, while Roth IRAs tax free. Other factors, like having access to an employer-matched plan with matching contributions can have an impactful effect.
Traditional IRA
If you want the upfront tax advantages of a traditional IRA, look no further. Anyone with earned income (provided they do not exceed applicable IRS thresholds) is eligible to open one. Furthermore, unlike workplace retirement accounts which limit you in what investments to select with an IRA you have more freedom in choosing your investments with this account type.
Traditional IRAs not only offer tax savings upfront, but they also allow tax-deferred growth of investment earnings until withdrawal in retirement – which is especially valuable when your tax bracket may change decades down the line.
Traditional IRAs come with one significant drawback: you must start taking withdrawals by age 73 in order to pay taxes. Therefore, if your retirement savings will likely be taxed at a lower rate in future years than initially projected, a Roth IRA might be better for you. A SEP IRA offers small business owners another alternative but requires them to contribute equally regardless of employee compensation level.
Roth IRA
If your expected tax rate in retirement will be lower than it is today, Roth IRA may be an advantageous investment strategy. With no upfront tax break and tax-free withdrawals – plus being able to leave it behind to your heirs! – the Roth IRA provides the perfect mix of tax breaks.
A Roth IRA can be an ideal retirement savings solution for individuals with high incomes who do not meet eligibility requirements to contribute to workplace savings plans like 401(k). It also works well for self-employed workers or those who already have access to workplace savings plans but wish to increase their retirement funds further.
If you prefer having experts choose your investments for you, we recommend opening a Roth IRA through one of our recommended online brokers. They provide access to diverse portfolios curated by industry professionals for investors of different ages – conservative or aggressive investments may also be provided depending on investor age. In addition, educational services will help maximize the benefits of your IRA account.
Rollovers
Rollovers can be an excellent solution for individuals who have recently switched jobs and wish to consolidate their retirement savings in one account. Furthermore, this strategy can prevent taxes on any growth (capital gains and dividends) until withdrawals take place.
NerdWallet editors have evaluated several brokers and robo-advisors who specialize in handling IRAs as the ideal IRA providers, providing low fees and minimums, investment choices and customer support. NerdWallet editors conducted annual reviews that scored them against 15 factors such as account fees/minimums/investment choices/mobile app capabilities/investor education resources etc.
Be sure to select a direct rollover, which means your old employer will send money directly to your new provider without withholding taxes. An indirect rollover requires moving it yourself, possibly leading to unexpected tax consequences.
Minimums
Contribution limits for traditional IRAs are set by the IRS and individuals can only contribute if they have earned income or receive distributions from workplace retirement plans (such as 401(k)) which exceed contribution limits.
SEP IRA plans allow employers to set maximum contributions based on either: employer compensation up to $69,000 in 2024, or 25% of each employee’s wages. In addition, these plans permit more generous employer contributions during prosperous years while more modest ones.
Small business owners looking for tax-advantaged savings solutions might consider the SIMPLE IRA, although this solution may add administrative costs. Capped at 100 employees and requiring employers to contribute a set percentage of employee wages as their contribution, it may be suitable for small companies without other retirement plans in place. Your Merrill Lynch Wealth Management Advisor can assist with exploring all of their options; ultimately it comes down to personal preferences regarding tax-advantaged saving strategies as well as your goals for financial security.
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