What Are the 3 Types of IRAs?
IRAs can be invaluable tools for those saving for retirement, but there are a few considerations you should keep in mind before opening one.
Traditional IRAs allow you to claim a tax deduction, thus lowering your taxable income. Investment earnings grow tax deferred until withdrawal at retirement time when they will become subject to taxes as current income.
Traditional IRAs allow you to invest pre-tax dollars and see their earnings grow tax-deferred until you withdraw them in retirement, typically after age 59 1/2. Your contributions may be invested in various stocks and mutual funds as well as FDIC-insured products like money market accounts or fixed rate CDs.
Self-employed workers and small-business owners who use Simplified Employee Pension (SEP) IRAs for retirement savings frequently set them up. Employers can contribute up to 25% of an employee’s compensation through matching contributions or non-elective ones as needed. Like Traditional IRAs, SEP IRAs also feature annual contribution limits as well as rules about taking money out – like paying the 10% early withdrawal penalty when withdrawing funds, though this penalty may be waived if an account from an earlier employer’s tax-advantaged plan is transferred over within 60 days after changing jobs (there may be exceptions in this rule).
IRAs can hold virtually every kind of investment imaginable, including stocks, bonds and mutual funds. You may even gain access to more specialized assets through certain custodians – like precious metals or private equity funds – that may not otherwise be accessible. All IRAs come with certain restrictions and require you to start withdrawing at a specified age.
Your tax savings from contributing money to a traditional or Roth IRA depend on your income and tax filing status, with these accounts growing tax-deferred until it comes time for withdrawal, typically upon retirement.
People who prefer hands-off investing may want to work with a robo-advisor, which uses automated technology to make investment decisions at much lower fees than professional advisors would charge. They are an attractive option for those who find selecting individual stocks difficult or want a diversified portfolio with lower risks.
SDIRAs offer similar tax benefits as regular IRAs, yet enable investors to explore alternatives beyond stocks, bonds, and ETFs for retirement investment – such as real estate, private entities, cryptocurrencies and precious metals.
But the IRS has specific rules governing how investments are bought and sold; transactions that involve family members or those with potential conflicts of interest – known as disqualified persons – may be frowned upon.
Given that these investments may be difficult to value and difficult to liquidate, it’s essential that an investor takes extra steps to verify information on their SDIRA account statement. This may involve getting an independent valuation or researching tax assessment records; such extra steps help protect a self-directed IRA against fraud by giving more granular details than what a traditional brokerage account would allow.
If you recently left a job, there may be money in your former employer’s retirement plan just waiting to be cashed out – potentially jeopardizing any retirement planning efforts as taxes and penalties would come due.
Switch that money over to an IRA through either a transfer or rollover; you have 60 days after doing so to deposit them before it counts as taxable income.
There are various IRA providers who can assist in opening and managing an IRA account for you. Their options may include mutual funds and ETFs; or for more experienced investors they provide self-directed IRAs that enable investing in things such as real estate. Furthermore, IRAs offer numerous tax benefits; investing now gives a tax break now, while you’ll be able to withdraw contributions and earnings tax-free in retirement.