Types of Retirement Accounts

retirement-accounts

There are several different types of IRAs that a person can choose to set up when they are looking for retirement options.  IRA is short for Individual Retirement Account. When you open an IRA that money that you deposit has a lot of tax advantages over the money that may just be in your bank accounts.

Some people think that IRAs are investments but this is not true. They are a specialized account that allows holders to invest in a few different things within that account.  You have several choices when it comes to where you can open an IRA.  These choices include:

  • Brokerage firms
  • Banks
  • Mutual fund companies
  • Insurance companies
  • Other financial institutions

Money that is put into an IRA can be used for many different financial investments including CDs, mutual funds, stocks, bonds and any other type of financial investment.  They are a great way to start building a retirement portfolio.

Types of IRAs

There are several different types of IRAs that you can elect to open. Each one has their pros and cons.  We have listed them below.

traditional-iraTraditional IRA – The name of traditional IRA is given to the regular IRA that is most popular with those under 70.5 years old.  Traditional IRAs came about in 1974 and were introduced by Congress.  It was a way to encourage people to start saving for their retirements by offering those who opened them special tax treatments.

One of the major pros of a traditional IRA is that once you have your money in the IRA no taxes are due on the earnings, interest or dividends for as long as it is in the IRA.

Another pro is that the contributions that you make to your IRA can be tax deductible for you if you meet the requirements.

Some cons of the traditional IRA is that you do have to meet certain tax criteria to get those deductions, so it’s possible for you to  not qualify even if you made contributions.  Your accountant will have those criteria.  If you withdraw your IRA early and you are less than 59 ½” old, there is a penalty that account holders will pay.

In addition you will HAVE to start taking the minimum distribution by the time you are 70 ½ years old whether you want to or not.  There are caps on the deductible amount you can take and that amount can change each tax year so check the amounts with a tax preparer or accountant.

For example, in 2014-2015 tax years the most you can contribute on a tax deductible basis is $5,500 and for older account holders it is $6,500. You can make more than that in the way of contributions to your IRA in general, but over the listed amounts will not be tax deductible.

roth-iraRoth IRA – Roth IRAs also have special tax rules that apply to the account holders, but there are many differences that separate one from the other. Unlike a traditional IRA, the contributions you make to your Roth account are NOT tax deductable.

What this means is that the funds have been deposited after taxes have come out.  Once they are in the account, they can increase tax-free and also unlike traditional IRAs, when you withdraw them they are tax free since the tax has already been paid prior to deposit.

Another very favorable benefit to a Roth IRA is that you can leave money in it for your entire life.  There are some requirements that come along with a Roth including a $5,500 limit and your adjusted growth income has to be below a certain amount to use the full contribution.

You would do this as a single tax filer.  These limits will change with different tax years. The limits and income requirements now are higher than they were back in 2000 for example. Your account will be able to give you the information on the contribution limits and income requirements.

rollover-iraRollover IRA – A lot of the IRAs that people are familiar with are either Roth or Traditional, but there are a few other types as well such as the Rollover IRA.  What a rollover IRA does is allow account holders to transfer their funds from one retirement account to a different IRA or retirement plan without any penalties or taxes.  The IRS allows account holders to complete these transfer within 60 days.

One of the new rules that the IRS has started with the 2015 year is that there is a restriction of one rollover per 12 month period which wasn’t the case before.  There are a couple of exceptions to this limit though.  The limit does not include transferring funds from one trustee to another and it doesn’t include converting a traditional IRA to a Roth IRA.  A plus is that the exceptions mentioned have no limits.

SEP, SARSEP, and SIMPLE IRAs

Small business owners pay attention to this section. Here is a video that explains the differences.

These three IRAs are not the typical payroll deduction type accounts that traditional and Roth IRAs are. Each of these three types are set up a little differently.

SEP IRA – SEP

stands for Simplified Employee Pension plan. With this type of IRA the employer makes contributions to their own retirement plans as well as their employees retirement accounts.  These contributions are direct.

SAESEP – Next on the list is the SARSEOP or Salary Reduction Simplified Employee Pension.  These plans are retirement plans that have been opened prior to 1997 and include both a payroll deduction plan AND an SEP.  One of the pluses about an AERSEP is that it has lower costs than others.

growth-chartSIMPLE IRA – Last but not least is the SIMPLE IRA or the Savings Incentive Match Plan for Employees. This plan is set up to where the employer can contribute to the employees’ retirement plans as well as their own.  These plans can be arranged in such a way that the contributions can be deducted from the employees’ salaries and then the employers can match those contributions that the employees make.

Unfortunately in today’s workforce, these retirement plans are not as prevalent as they once were but employees can still find them offered with some companies.

There are no defined criteria that can provide what the best IRA is for you. That will depend on several factors that come into play to help you decide which the best choice is for you.  You want to make sure that your needs are met.

One of the first things you should do before deciding what type of IRA you want to set up is determine what your retirement goals are and your savings goals as well. There are places that you can go to get help with retirement planning or you can do your own research to find the one best suited to you.  Start your retirement planning early and you will be well on your way to financial security when your retirement comes.

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