Which Type of IRA is Best?
IRAs provide tax-advantaged ways to save for retirement. Discover their features and which type may work best for you: Roth or traditional accounts.
An Individual Retirement Account, or IRA, gives you access to a wide array of investments like CDs and stocks from leading brokerages. Fees vary; Betterment is one such robo-advisor that offers low fees with valuable features.
Traditional IRA
A traditional IRA is an individual retirement account that enables you to save for retirement tax-free, with withdrawals taxed at lower bracket rates later in life. Your account can be funded with stocks, mutual funds or certificates of deposit as part of its assets.
Choose either actively managed funds that have professional money managers selecting and overseeing each security in your portfolio, or passively managed ones that track an index to mimic general market gains. Contributions made to traditional IRAs are always fully vested regardless of how long employees remain employed with an employer.
Should you change jobs, an IRA can also serve as an ideal home for your old employer-sponsored retirement plan. Workplace plans often offer limited investment choices compared with those available with an IRA – however be mindful not to exceed any annual contribution limits!
Roth IRA
Many consider Roth IRAs superior to traditional IRAs; however, that depends on whether your projected income tax rates in retirement will be higher or lower than they were currently. Since it’s impossible to know exactly, educated estimates must be used.
Roth IRA contributions can be made at any age as long as there is earned income and that it does not exceed your MAGI limit, however you must be under age 59 1/2 to withdraw contributions without incurring taxes or penalties.
Roth IRAs can be invested in through banks, brokerage firms and financial institutions that specialize in Roth IRAs. Options may include real estate and commodities investments. Schwab Intelligent Portfolios provides automated advice based on retirement goals and risk tolerance while Fundrise, another relatively new player in this space, offers access to real estate investments that offer tax-free dividends that may increase returns significantly.
Non-deductible IRA
If you don’t meet the qualifications to deduct contributions but still desire tax-deferred benefits of an IRA, non-deductible accounts offer you these same tax-deferred advantages. Withdrawals will be subject to IRS Pro-Rata Rules when withdrawing money based on age at time of withdrawal.
Small business owners with less than four employees may wish to consider setting up and administering a Simplified Employee Pension (SEP) plan as a cost-cutting measure, contributing funds directly into employees’ individual retirement accounts. It’s easy to set up and administer, making an SEP plan an attractive solution.
However, this IRA requires more of an administrative burden. For example, filing Form 8606 and keeping records of after-tax contributions are both requirements of an SEP IRA; catch-up contributions cannot be made and Roth contributions aren’t an option compared to other types of IRAs available – thus limiting tax planning opportunities available compared to other types. Because of these constraints it tends to only make sense for high income families or when tax planning opportunities exist within other IRAs; ultimately it’s usually better making contributions when tax deduction is an option available compared to using SEP IRAs when applicable.
Self-directed IRA
Self-directed IRAs (SDIRAs) enable investors to gain access to nontraditional investments that may not be accessible through traditional brokerage accounts, including non-traditional assets like private equity, real estate and LLC membership interest. An SDIRA also allows you to choose an IRA custodian who specializes in these areas; however, these accounts have different rules than traditional IRAs – some which prohibit life insurance or collectibles being included within them.
SDIRAs can be complex to manage and require a high level of knowledge and experience, making them best suited to those with a higher risk tolerance who seek diversifying their retirement portfolios with non-traditional assets. NerdWallet’s ratings take account of fees and minimums, investment choices, customer support capabilities and mobile app capabilities when rating custodians before narrowing your options based on investments you prefer before selecting a custodian based on fees and services offered.
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