IRAs- What’s the Difference and Which is the Right IRA for You?
IRAs, ROTH IRAS, 401(k)s… the list goes on. There are many different kinds of retirement accounts and without proper knowledge you could easily get overwhelmed, or worse leave money on the table! Picking the right IRA can be difficult, here it’s broken down for you:
IRA- Individual Retirement Account. At it’s core, an IRA is an account set up by you (the individual) for retirement. There are a number of different types of IRAs and different situations where each is applicable, so understandably it can be difficult to choose the right IRA. Retirement accounts are an important part of your financial plan (here’s a step by step guide).
Traditional IRA
Basics: A traditional IRA is a deferred retirement account, meaning you pay taxes when you take money out in retirement. Your account can grow faster because the gains are allowed to compound without taxes!
Eligibility: Earn taxable income and be younger than 70 1/2 , that’s it! (There are some restrictions that may make a traditional IRA a poor choice in certain situations)
Withdrawals: You can take money out of your Traditional IRA at any time, but you will have to pay taxes. If you take it out before you are 59 1/2 you will have to also pay a 10% penalty fee-it is a retirement account! You must start making withdrawals at 70 1/2 ( this is known as required minimum distributions RMDs).
Roth IRA
Basics: A Roth IRA is a tax-advantaged retirement account that you contribute after tax money to. An example would be extra savings from a paycheck (you’ve already paid payroll taxes!) Your money grows tax free and you don’t pay taxes when you take the money out during retirement.
Eligibility: Eligibility limits are controlled by income level. You can contribute to a Roth IRA if your modified adjusted gross income is less than $132,000 (single) or $194,000 (married). Don’t fear – backdoor IRAs are available if you make over the income level
Withdrawals: You can take money out of your Roth IRA at any time, but you can’t take out any investment earned, unless it’s for a qualified reason. Once you turn 59 1/2 you can start taking out distributions without a penalty. Roth IRAs have no mandatory withdrawal requirements
SEP IRA
Basics: A SEP IRA is an IRA for self-employed individuals or small business owners. Like a traditional IRA, the money is not taxable until it is withdrawn.
Eligibility: A SEP IRA works like a traditional IRA. Individuals must be over 21, have worked for the company for 3 of the last 5 years and have an income of at least $600. You can put away up to 25% of your income into a SEP IRA!
Withdrawals: SEP IRA withdrawals work like traditional IRA withdrawals, there is a penalty fee if you take withdrawals before 59 1/2.
SIMPLE IRAs
Basics: A SIMPLE IRA (Savings Incentive Match Plan for Employees) is for small businesses. It also works like a traditional IRA. Unlike SEP IRAs, employees are able to make contributions. The employer is required to match the employees’ contributions.
Eligibility: The company providing the SIMPLE IRA must have less than 100 employees earning more than $5,000 each. You can contribute up to $12,500 for 2017 and an extra $3,000 in catch up if you’re over 50.
Withdrawals: SIMPLE IRA withdrawals work like traditional IRA withdrawals, there is a penalty fee if you take withdrawals before 59 1/2.
Hopefully this helps you choose the right IRA for you!