Most everyone would agree that saving for retirement isn’t only a good idea, it’s a necessity. But to the uninitiated, the very thought of IRAs can be seem mind-boggling. There are a variety of types of individual retirement accounts, each with distinct considerations, tax advantages and governmental regulations.

Which Type of IRA is Best for You?

How do you know which is best? It all comes down to your specific circumstances and long-term goals. It’s always a good idea to explore your options with your personal financial planner or CPA and do your own due diligence. But first let’s get a basic understanding by taking a look at some of the better-known types of IRAs and what distinguishes each. (You can find a more detailed explanation of the rules from the IRS by clicking here.)

Each type of account allows your money to grow tax-free. With a traditional, SEP or SIMPLE IRA, taxes are deferred until funds are distributed. With a Roth IRA, distributions are tax-free.

In most cases, however, if you withdraw money from your IRA before you reach age 59½, you will have to pay a penalty in addition to any regular required income tax.

TRADITIONAL IRA

The so-called “traditional” IRA is any investment retirement account that is not a Roth IRA or a SIMPLE IRA. You can open and contribute to a traditional IRA as long as you—or your spouse, if filing a joint return—have compensation (i.e., wages, salary, commission or some other particular qualifying income) and will not have reached age 70½ by year’s end. You may open the account at any time, but the window for making a contribution is limited during a given year. This is a very common way for many Americans to build a retirement nest egg, since most employers’ 401(k) and 403(b) plans include payroll deduction to fund the account. In addition, companies also often offer matching contributions, up to a point. Distributions must be taken beginning by April 1 of the year following that in which you turned 70½. Contributions may be deducted on your annual income tax form.

ROTH IRA

A Roth IRA, opened either as an account or annuity, is primarily subject to the same requirements as a traditional IRA. Unlike with a traditional IRA, you are contributing after-tax dollars and you may not deduct the amount of contributions from your income tax. Your money grows tax-free and there is no tax due upon withdrawals after you reach age 59½. Another difference is that there is no mandatory withdrawal at age 70. However, you must have the account open for five years before you can take out any distribution. Contributions can be made after you reach age 70½. And you can leave amounts in your Roth IRA as long as you live. The account must be designated as a Roth IRA at the time it is opened. There are limits to the amount that can be contributed, with overages incurring a penalty fee. Other IRA types (traditional, SEP, SIMPLE) can be rolled over into a Roth account, under certain conditions.

SEP IRA

A SEP (Simplified Employer Pension) IRA is used mostly by small-business owners or those who are self-employed. As the IRS points out, a SEP IRA allows you to contribute toward your own and your employees’ retirement without getting involved in a more complex qualified plan. Under a SEP, the employer makes contributions to a traditional individual retirement arrangement set up by or for each eligible employee—and owned and controlled by the employee. The contribution limit is much higher than for traditional and Roth IRAs, and are not required every year. When they are, however, the contributions are calculated according to a formula to ensure no favoritism toward highly compensated individuals. There are other unique rules for a SEP, as well, and more paperwork for the business owner.

SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employees) IRA allows small businesses (those with fewer than 100 employees) to set up employee retirement accounts with less paperwork. Accounts must be set up for all eligible employees, who may choose to make salary reduction contributions to the plan rather than receiving the amounts as part of their regular pay. Employers must either match employee contributions or make unmatched contributions. In addition, there are specific rules applicable to a SIMPLE IRA, which you should discuss with your individual tax adviser.

IN CONCLUSION

Having—and growing—a retirement account is a smart strategy for anyone. And you can “turbo-charge” the financial advantages when you roll over your investment funds into a self-directed account. Helping investors navigate that often-confusing process is our specialty at Investment Resource of AZ, LLC. Of course, you should do your own due diligence in determining whether a rollover makes sense for you. Once you have decided that it does and you are ready to tackle the process—or if you simply want more information—we can help. Our team has successfully rolled over millions of dollars in IRA funds for clients, educating them, streamlining the process and supervising each step of the way for them. Call us at 602-885-6122 or email evelyn@azirarealestate.com.