Investing & Retirement: Different Types of IRAs

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What is an IRA?

An Individual Retirement Account (IRA), is an investment account that allows for certain tax benefits. An IRA will contain many different types of investments, including stocks, bonds, ETFs, and mutual funds. The purpose of an IRA is specifically to save for retirement. This means that if you try to withdraw the funds before the age of 59, you will need to pay a fee of 10% of the withdrawn amount. There are a few different types of IRAs to choose from.

Traditional IRA

This type of IRA is by far the most well-known and popular among Americans. Each year, an individual can contribute up to a maximum of $6,000 into their IRA. For people over the age of 50, they can contribute up to $7,000 annually. These contributions are tax-deductible, therefore their amount of taxable income is decreased. The funds in this account are not taxed until they are withdrawn at the time of retirement. At this point, the money will be taxed at the individual’s current tax rate, which will likely be lower than it was at the point of contribution. The people who would benefits most from this IRA are individuals who are currently in a high tax rate, or employees who do not have a workplace pension fund.

Roth IRA

A Roth IRA will not provide the contributor a deduction on their taxes. This means that their taxable income will not decrease when they contribute to their IRA. However, when the individual withdraws the money when they are retired, it will be tax-free. The contribution amount is the same as the traditional IRA. This type of account would be best for people who estimate that they will be in a high tax bracket when they retire, as they will not get taxed when they withdraw their money.

SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) IRA has the purpose of providing self-employed individuals and small company employees for retirement. It is useful if someone does not have an employer 401(k) plan. Employees can contribute to this IRA by means of salary deferral. An individual can contribute up to $13,500 into this IRA. Typically, an employer will need to match 3% of their employee’s contribution or 2% of the employee’s compensation as a fixed amount. If you have a SIMPLE IRA and want to move some of the money into a Traditional IRA, this is possible to do so after two years.

Spousal IRA

Typically, a taxpayer needs to have earned income in order to contribute to an IRA. However, this rule does not necessarily apply to a married couple. If one partner is not working or earning very low income, they can still contribute to their separate IRA. To do so, the couple must file a joint tax return, and one of them must have taxable income. The total amount added to both IRAs must be less than $12,000, as this is double the IRA annual limit. If the couple is both over 50 years old, the maximum amount for both IRA accounts is $14,000 annually.

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