An Individual Retirement Account, or IRA, makes saving for retirement easy, creating a fund for you to sock away stocks, bonds, mutual funds and other assets.
But with so many options out there, it can be overwhelming to choose the right account for you. We’re here to help by breaking down the four most popular types of IRAs and who benefits the most from each one.
1. Traditional IRA
A traditional IRA is one of the most common types of IRAs. With the ability to open and contribute to a traditional IRA until the age of 70-and-a-half, it can serve as your sole retirement fund or as an addition to a 401(k) plan. There’s an upfront tax break of up to $6,000 per year (as of 2019), or $7,000 if you’re over the age of 49.
Some features of the traditional IRA include:
- No income limit, meaning you can contribute to a traditional IRA no matter how much money you earn.
- Ability to deduct the full amount of your contribution to your traditional IRA on your tax return, so long as you aren’t covered by a retirement plan at your place of employment.
- No tax on your investment earnings under protection of the account.
- The traditional IRA is best for workers who don’t have access to a workplace-sponsored retirement plan, or for those who are in a higher tax bracket now than what they anticipate to be in retirement.
2. Roth IRA
While a traditional IRA is a great way to invest for your future, a Roth IRA allows you to access some of the money in your account before retirement age if you absolutely need to.
Another difference between Roth and traditional IRAs is that a Roth IRA’s contribution eligibility is based on your income, so if you earn too much, you won’t be able to participate.
There’s no upfront tax break like traditional IRAs offer, but withdrawals made during retirement are tax-free for Roth IRAs.
This retirement account is best for lower- or medium-wealth workers who anticipate being in a higher tax bracket in retirement or for those who might need to access the funds before retirement age.
Related: The 6 Types of Savings Accounts
3. SEP IRA
A simplified employee pension, or SEP IRA, is a good account for small-business owners, freelancers or otherwise self-employed individuals. Contributions are tax-deductible, and business owners get tax benefits for setting up and funding the account for their employees.
Here are a few other tips to know about SEP IRAs:
- They allow higher annual contribution limits than most other tax-favored retirement accounts. The SEP IRA allows up to 25 percent of employee compensation.
- The contribution size must always be equal for all eligible employee accounts based on a percentage of salary. Contribution size may vary year to year per the business’ cash flow.
- Employees must have worked for the employer in at least three of the last five years and earned at least $600 during the year to be eligible. Employees cannot contribute to the plan via salary deferral.
- SEP IRAs work best for small-business owners who want to offer their employees a retirement plan.
4. SIMPLE IRA
Existing mostly for self-employed individuals and small companies, the SIMPLE IRA (Savings Incentive Match Plan for Employees) is similar to a 401(k). Employees are able to contribute to the account via salary deferral, and contribution limits are lower than that of a 401(k).
To qualify for a SIMPLE IRA, the employee must have earned at least $5,000 during any two years with the employer. Most of the time, employers are required to match three percent of each eligible employee’s compensation.
Contributions to the SIMPLE IRA are required every year and tax-deductible. After two years of participating in a SIMPLE IRA plan, participants take money from the account and place it into a traditional IRA plan.
The SIMPLE IRA is best for smaller companies with fewer than 100 employees.
Other Ways to Use IRAs
In this day and age, most people don’t start out working for the same employer they end up retiring from. So, what do you do with the 401(k)s you’ve collected from previous jobs? Cashing out the fund causes you to lose money, so it’s best to roll it into a rollover IRA.
By rolling over your 401(k) into a new IRA, you can contribute up to $6,000 per year, or $7,000 if you’re 50 or older. Review the different types of IRAs above to see which fits best for you, and complete the rollover online through your preferred investment company.
When you’re unemployed, it can feel impossible to generate funds for your retirement. However, if your spouse is working and you’re not, you can qualify for a spousal IRA.
Depending on your income and preference, a spousal IRA can either be a traditional or Roth IRA, and you can contribute up to $6,000 per year in 2019. Spousal IRAs are a great way to double your family’s IRA contributions.
How To Open an IRA
After reviewing the most popular types of IRAs and choosing which one fits best for your lifestyle, you can open an account with Mercer Savings Bank.
As a trusted community bank for over 130 years, Mercer Savings has the tools and knowledge to help you throughout your retirement journey. Let’s talk about your future – contact us today and we can get the perfect IRA set up for you.