Understanding the Different Types of IRAs

Saving up for retirement should be a long-term goal for most everyone. However, if you’re unable to secure a 401K plan through your employer, you may be confused as to how to set up a nest egg for yourself to rely on once you’re ready to take a break. While you may already know about traditional IRAs and Roth IRAs, there are a few other interesting options you should look into before ruling out. While some retirement options are less well known, they actually offer a few benefits like better savings and more tax breaks that make them equally attractive to more conventional plans. The following article will help you understand the different types of IRAs so that you can make a more informed decision on what works best for you.

Roth and Traditional IRA

Let’s start with the most popular IRAs; the Roth and the traditional. The former is great because it helps you save on taxes. The contributions in a Roth IRA are not deductible, so while there’s no tax break right off the bat, the withdrawals in retirement are completely tax-free. You should know that the maximum amount you can contribute annually to a Roth IRA is six thousand dollars – you can only submit a bit more than that, seven thousand dollars a year, once you turn fifty. In general, Roth IRAs are recommended for people who think they may be in a higher tax echelon once they retire, and would therefore appreciate taking advantage of tax-free withdrawals. It might also work out better for savers who feel they may need to access their money before retirement age. Even though this is discouraged, emergencies crop up, and a Roth IRA can serve you better in these instances.

A traditional IRA is even more popular and includes an upfront tax break of six thousand dollars. The contributions are deductible, which is great because it lowers the amount of taxable income you’d have in a year. It’s also a good option to have if you need something to work in conjunction with the retirement plan set up by your workplace. Also, investment earnings are not taxed, and the withdrawals during your retirement are taxed at a set rate amicable to that time. 

Self-Directed IRA

This one is pretty similar to Roth and traditional IRAs, except for one crucial difference: a self-directed IRA allows you to put a wider range of investments into your account. Most IRAs put a cap on the kind of investments put into the account allowing for things like stocks, bonds, and mutual funds. However, a self-directed IRA allows you to parlay assets like real estate or stake in a privately held company into a viable retirement account. To get a self-directed IRA going, you would need a trustee who is well informed about the type of investments you’re hoping to put into your account. Also, as a side note, the IRS doesn’t allow things like life insurance policies or personal belongings like a stamp collection – no matter how valuable – to be included in the account. While the benefits of this retirement plan are clear in that it provides a bit of autonomy to experienced investors who want to directly manage their assets within the framework of retirement, it does come with a few risks, so it’s important to choose wisely.

Simplified Employee Pension (SEP)

The SEP plan is in some ways similar to a traditional IRA except it is funded by the employer on behalf of their employees, for which they receive a tax benefit. Earnings grow tax-free, but the distributions in retirement are taxed. A clear benefit to this plan is that you can put away far more money in a SEP than you would be able to with a traditional or Roth IRA, and the employer will have to contribute equally, which is a definite plus. That being said, employees cannot tap into the benefits of a SEP without having worked at the company for a set number of years first, so there isn’t a ton of control available in this kind of retirement account.

Depending on your level of familiarity with investing, as well as your own financial situation and current salary, you will find the right IRA for you. However, it takes some research, and you do need to take a risk assessment to see which option works for your own personal circumstances. There are many resources available online, but it also doesn’t hurt to reach out to a financial counselor to help clarify things further for you. 

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