Are There Two Types of IRA?

Many investors have questions about the differences between traditional and Roth IRAs. Both offer tax breaks to help save for retirement, but each operates differently.

Choose an Individual Retirement Account (IRA) to access more investment choices than what your employer-sponsored retirement plan or pension can provide. Before settling on a provider, evaluate fees, opening requirements, educational resources and fees associated with opening an IRA account.

Traditional IRA

An individual retirement account (IRA) provides you with a tax-advantaged way of growing your investment earnings. You can invest in many forms of investments such as stocks, mutual funds and exchange-traded funds.

Contributing money to a traditional IRA allows you to take advantage of tax breaks, while the earnings from it won’t incur taxes until withdrawal – you can use withdrawals for qualified expenses like medical costs and education costs.

Traditional IRAs are available to anyone with earned income who does not already participate in an employer-sponsored retirement plan such as 401(k) or 403(b). Your annual contribution amount depends on both your filing status and income levels.

Dependent upon your circumstances, a traditional IRA could be the right solution for you. Speak with a Thrivent wealth planner about all your available options. *As of 2023, individuals aged 70 1/2 must start taking mandatory minimum distributions from their IRA (unless an exception applies)*

Roth IRA

Roth IRA contributions are made using post-tax dollars, meaning you don’t get an immediate tax break as with traditional IRAs; however, you do benefit from tax-free growth of investments that grow without incurring taxes when withdrawing them in retirement – just as with traditional IRAs!

Roth IRA contributions are subject to limits based on your income and filing status, with eligibility dependent upon them. If your income exceeds this threshold, however, contributing may no longer be possible altogether; however, there may be ways around it, including setting up a backdoor Roth IRA account.

Just like with other tax-advantaged accounts, traditional and Roth IRA contributions are tax-advantaged, provided you abide by contribution and income limits. When selecting between them it is important to keep in mind both current and anticipated tax rates in order to determine which account type to fund first.

SEP IRA

SEP IRAs are tailored specifically for self-employed individuals and small businesses with no employees, offering higher contribution limits than traditional or Roth IRAs or employee 401(k) plans. You can easily set one up by contacting an investment firm, financial planner or robo-advisor that offers SEP IRA accounts – they will complete IRS Form 5305-SEP on your behalf while offering various investments options to invest your funds.

Employers can claim a tax deduction for contributions they make to employees’ SEP IRAs, providing small businesses with low or no payroll taxes a great advantage. Furthermore, the accounts aren’t subject to federal withholding or social security/Medicare taxes and employees can withdraw their money penalty free if they are over 59 1/2.

SEP IRAs require employers to contribute an equal percentage of each employee’s compensation, which can present some challenges to small-business owners when there are different income levels within their workforce.

SIMPLE IRA

IRAs offer employees an effective way to save for retirement while taking advantage of tax savings. To get the most out of your investments in an IRA, speak to an expert in tax or financial planning for advice.

SIMPLE IRA plans allow employees to save a portion of their pay before taxes are deducted, reducing taxable income while providing tax-deferred growth on that money. They can invest their contributions in stocks or mutual funds; moreover, employers make a non-elective 2% contribution regardless of whether their employees opt-in.

Employers can establish SIMPLE IRAs using either IRS Form 5305-SIMPLE or 5306-SIMPLE, depending on whether they wish to select one custodian for all employees’ accounts or provide multiple financial institutions as options for employees’ accounts. The plan is open to small business owners with 100 or fewer eligible employees; employees must be aged 21 or over and earned or expected to earn at least $5,000 over either the two preceding calendar years or in the current year.


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