Types of IRAs
Traditional or Roth IRA accounts can be excellent ways to save for retirement. You should carefully consider which option would work best in light of your personal situation and goals.
The top IRA providers provide competitive investment choices, low fees and exceptional customer service. In this article we’ll compare each available option and help you select one that will meet your individual needs.
Traditional IRA
Traditional IRAs are an attractive option for investors seeking tax benefits. You could qualify for tax deductions on contributions (provided they meet IRS limits), while your earnings grow tax-deferred. When withdrawing money during retirement, however, taxes will need to be paid at your ordinary income tax rate.
With a traditional IRA, you have access to various investments including stocks, bonds, mutual funds and exchange-traded funds (ETFs). Active management – in which professional money managers attempt to outwit the market through research and stock selection – or passively managed mutual funds which follow an index can match market gains more closely than active management does. Your choice ultimately may depend on your tax bracket and distribution goals, which your Merrill Lynch Wealth Management Advisor can assist with. In some instances it might even make sense for you to explore other forms of tax-advantaged saving and investing like Roth IRA.
Roth IRA
Although traditional and Roth IRAs may be the go-to options for retirement savings, savers should keep in mind that other types of IRAs also provide tax-saving, money-growing advantages. Spousal, SEP and SIMPLE IRAs could all offer retirement saving solutions worth exploring.
Traditional IRAs provide an upfront tax benefit by deducting contributions, potentially lowering current income taxes. You’ll also enjoy tax-deferred growth until withdrawal in retirement – making this type of account ideal for workers expecting higher tax brackets at that point in their lives.
Roth IRAs are funded with after-tax dollars and do not provide an upfront tax deduction, but may provide potential tax savings when withdrawing them in retirement, as withdrawals will be exempt from federal income taxes and there are no required minimum distributions. When opening one online or robo advisor providers may offer different eligibility rules and contribution limits than others so if opening a Roth IRA may be best option.
SEP IRA
Simplified Employee Pension plans (say that five times quickly!) are IRA-type retirement accounts popularly utilized by small business owners and self-employed. Although similar to Traditional IRAs in terms of eligibility rules and contribution limits, they have significantly higher contribution caps.
An employer may contribute up to 25% of an eligible employee’s compensation annually and allow them to invest it however they please. SEP-IRA contributions are tax deductible in the year of their creation while withdrawals will generally be taxed at regular income tax rates similar to other retirement accounts.
Setting up a SEP-IRA is straightforward, and financial institutions or trustees can handle everything from depositing contributions and investing them to annual statements and administrative duties. Just remember that participants in SEP-IRAs must begin taking minimum distributions at age 72–in addition to any required minimum distributions from other tax-favored accounts they own.
SIMPLE IRA
Businesses with 100 or fewer employees can utilize the Savings Incentive Match Plan for Employees (SIMPLE IRA) as an easy and cost-effective means of offering retirement savings plans to employees. Employers either match employee contributions dollar for dollar up to a certain percentage, or make uniform nonelective contributions that provide retirement security.
SIMPLE IRAs differ from 401(k)s by having more flexible requirements regarding who and when can participate. Employees may participate in these plans if they earned at least $5,000 annually in any two previous years and expect to reach or surpass this figure this year.
Similar to 401(k)s, SIMPLE IRA funds grow tax deferred until withdrawn and can be invested across banks, savings and loan associations, insurance companies, certain regulated investment firms and federally insured credit unions. Withdrawals before age 59 1/2 may incur income taxes and penalties; however employees can transfer them into another qualified plan such as a safe harbor 401(k) without incurring such charges.
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