Individual Retirement Account (IRA)
Candlefocus EditorThe four main types of IRAs include Traditional IRA, Roth IRA, Simplified Employee Pension (SEP) IRA, and Savings Incentive Match Plan for Employees (SIMPLE) IRA.
A Traditional IRA is a traditional retirement plan where contributions are tax-deductible and any earnings grow tax-deferred. Withdrawals can be taxed at the holders ordinary income tax rate. Usually, Traditional IRAs have an annual income cap on deducting contributions.
A Roth IRA works a bit differently than Traditional IRAs, contributions are not tax-deductible, however, money held in the Roth IRA grows tax-free, and withdrawals at retirement age (59 ½) are tax-free. Unlike Traditional IRAs, Roth IRAs have income limitations on contributing.
Simplified Employee Pension (SEP) IRAs provide retirement savings account options to those who are self-employed, own small businesses, are employees or employers, or receive payments other than wages, such as fees from being a partner in a business. A SEP IRA provides tax advantages similar to a traditional IRA and employers can also contribute to their employees’ SEP IRA.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs are available to small businesses with 100 or fewer employees. Employers must offer these plans and the contributions are tax-free. Employees must contribute some of the money placed in a SIMPLE IRA, the employer must match up to 3% of the employees’ compensation or make a 2% non-elective contribution.
Overall, an IRA provides individuals with tax advantages and is a great way to save for retirement. It’s important to understand the type of IRA and the contribution limits in order to make the most of a retirement savings plan. Additionally, most individuals should check with a financial advisor before setting up an IRA to make sure they understand the rules and regulations in order to make properly informed decisions.