3 Types of IRAs
IRAs provide tax-advantaged investments for retirement that give savers access to an array of investment choices.
IRAs can be an invaluable asset to employees without workplace retirement plans, yet not all IRAs are created equal. Here are three options you should keep in mind when making this choice.
IRAs allow individuals to save and accumulate tax-deferred growth until retirement, making them an appealing option for those without access to employer-based plans or seeking additional sources of retirement income.
Traditional IRA accounts can be found through various financial institutions, including brokerage firms and credit unions. Compare management fees, commissions and minimum opening requirements before choosing the most suitable solution for you.
Traditional IRAs provide tax deductions and allow investors to invest in various assets ranging from stocks and bonds to bank CDs, with tax benefits for both. But it’s important to keep in mind that withdrawals before age 59 1/2 may incur a 10 percent penalty, with exceptions available if using funds for education expenses, purchasing your first home, being disabled or facing high medical bills or purchasing collectible coins and bullion (unless highly refined gold is being invested in).
Roth individual retirement accounts (IRAs) provide investors with an investment vehicle that accepts contributions made with post-tax dollars and allows tax-free withdrawals at any time, without penalty or additional tax liability. Only earned income, such as wages, salaries, commissions and bonuses may be contributed to a Roth. A self-directed IRA may also be beneficial to people with substantial earnings, providing access to alternative investments like real estate and cryptocurrency investments. As of 2022 the contribution limit for Roths is $61,000 while individuals will not automatically become fully vested like traditional 401(k).
Withdrawals from a Roth account at any age are tax-free, allowing you to even use it to pay taxes; unlike with regular IRAs that require required minimum distributions starting at 70 1/2. Roths can be opened at brokerage firms, banks, mutual funds and credit unions – compare fees, commissions and minimum opening requirements to find the best deal – additionally seek educational resources if making investing decisions independently.
SIMPLE IRAs provide small employers with an employer-sponsored retirement plan without incurring the administrative and fiduciary responsibilities associated with an ERISA 403(b). Employees can save pre-tax dollars through payroll deductions while choosing how they want the funds invested.
Contrary to 401(k) plans, employee contributions made through SIMPLE IRAs vest immediately and can provide an incentive for employees who may otherwise leave for other opportunities. Furthermore, employers can make either an automatic contribution of 2% of each employee’s salary or match this with up to 3% matching contributions of their salaries.
Contribution limits under this plan are higher than those for traditional and Roth IRAs and 401(k) plans, and individuals aged 50 or over may make “catch-up” contributions to their accounts. Withdrawals made after reaching age 50 will be taxed as ordinary income; there is also a two-year rollover rule in effect when withdrawing money from this plan.
Self-Directed IRAs give their owners more autonomy in making investment decisions and writing checks than custodian-controlled accounts, which require approval by an outside entity before any decision can be made. They’re perfect for those looking to diversify their financial portfolio by investing in alternative assets like property, mortgage notes, foreign currency, annuities or raw land.
Investors must carefully research and understand the rules surrounding Self-Directed IRAs before opening one. A qualified custodian or trustee who can handle paperwork and transactions while performing due diligence on tangible alternative assets should also be found, while it’s also wise not to invest with disqualified people or entities, which could incur IRS penalties.
Self-Directed IRAs follow the same withdrawal regulations as traditional IRAs, yet can offer more flexibility to investors. Investors should note, however, that if funds are withdrawn before age 59 1/2 they will incur taxes upon withdrawal.