IRA in all varieties
It’s never too early to start thinking about retirement, but the most common topic at the forefront of that thinking is retirement savings. How can you start saving money now so that you can live comfortably after you retire? Depending on your goals and the amount of time remaining until retirement, there are multiple options and strategies to consider. A very common path for retirement planning is to open an IRA (Individual Retirement Account), as it provides tax benefits today and retirement savings for the future. Even if you’ve never heard of an IRA, a quick internet search will yield a variety of different types that can quickly get confusing. Why are there so many different types of IRAs, and what is each one designed for? Here is information about the most common types of IRAs.
Research Council: When researching various types of IRAs, be careful which sources you select. Various types of IRAs have become obsolete with changes in the tax code over the years, so make sure your research sources offer up-to-date information. The general information in this article is based on current information for fiscal year 2014.
Traditional IRA
A traditional IRA is an individual funded retirement account. There are annual limits on how much can be deposited into a traditional IRA. For 2014, that amount is the lesser of $ 5,500 for those under the age of 50 at the end of the year ($ 6,500 if the depositor is age 50 or older at the end of the year) or the depositor’s taxable compensation for the year. . For tax purposes, amounts deposited in an IRA that do not exceed the annual limits are not taxed during the current tax year. When funds are withdrawn from the IRA after retirement, they are taxed as part of your annual income for the year they are withdrawn.
Roth IRA
Like a traditional IRA, Roth IRAs are individually funded retirement accounts. There are annual limits on how much can be deposited into a Roth IRA. For 2014, that amount is the lesser of $ 5,500 for those under the age of 50 at the end of the year ($ 6,500 if the depositor is age 50 or older at the end of the year) or the depositor’s taxable compensation for the year. . The difference between a Roth IRA and a traditional IRA is that, for tax purposes, the amounts deposited in the Roth IRA are after-tax amounts (the amount deposited is taxed in the year earned). When withdrawn, the funds are not taxed as they have already been taxed in the year of deposit.
SEP IRA
A SEP (Simplified Employee Pension) IRA is a type of account funded by an employer on behalf of employees. Often used by freelancers. Deposit limits tend to be higher for SEP IRAs, and deposit amounts are taxed when withdrawn. Contributions cannot exceed the lesser of 1) 25% of the employee’s annual compensation or 2) $ 51,000 for 2013; $ 52,000 for 2014. With a SEP IRA account, withdrawals must be made beginning in the year the employee turns 70½. When opened on behalf of an employee, the SEP IRA is owned and controlled by the employee.
Simple IRA
A SIMPLE IRA (Employee Savings Incentive Matching Plan) is a type of retirement account that an employer establishes on behalf of employees. Contributions to the Simple IRA are made by the employee (through salary reduction contributions) and matched by the employer (employer matching is required up to certain annual limits). Employees can contribute up to a maximum of $ 12,000 per year for 2013 and 2014. The employer cannot limit the amount of contributions made by the employee, as long as it is equal to or less than the maximum.
Choosing the right IRA for you may involve contacting your tax professional and your local banker. Some banks, in addition to offering various types of IRAs, also offer retirement savings calculators to help determine the best way to reach your retirement goals. Make sure you understand all the options and their tax ramifications before selecting your IRA.
This article is intended to provide general information on various types of IRAs. It is not intended to provide legal, financial or tax advice. Consult a tax professional regarding your particular set of circumstances. You can also check www.irs.gov/Retirement-Plans for more detailed information.
