What Are the Two Types of Traditional IRAs?
IRAs can be invaluable tools for the 33% of private industry workers without access to workplace-based retirement plans, providing both an immediate tax break as well as postponing taxes upon withdrawal of investments in retirement.
Anyone with earned income can open a traditional IRA and contribute pre-tax dollars. Traditional IRAs may also be the right choice for people expecting to be in higher tax brackets when it comes time to retire.
Contributions
Traditional IRA contributions may offer you a tax break depending on your annual income and workplace retirement plan, and when made they could help lower taxable income to drop into lower tax brackets or qualify you for other tax incentives. Once retirement arrives and withdrawals start occurring you’ll still owe regular income tax on both contributions made as well as investment earnings made.
Traditional Individual Retirement Accounts can be opened with banks, online brokers and robo-advisors like Stash. An IRA rollover allows you to move money between institutions within 60 days – though doing so may incur fees and interest charges. Contribution eligibility requires having earned income such as wages, salaries or self-employed earnings – wages are eligible as are self-employed earnings from self-employment; married couples filing joint tax returns who both earn taxable income can open separate IRAs for themselves as long as both earn enough taxable income!
Earnings
Traditional IRAs allow tax-deferred earnings on both contributions and gains inside the account, meaning you only pay income taxes upon withdrawing money in retirement.
Consider opening a traditional IRA if your income exceeds what qualifies for a Roth IRA and/or you anticipate being in a higher tax bracket during retirement. Furthermore, this type of account could also help if your workplace plan doesn’t provide what you want or you are switching jobs.
Simplified Employee Pension (SEP) IRAs are a type of traditional IRA available to small business owners and self-employed workers. Employers establish the accounts for eligible employees, contributing a set amount annually based on company cash flow; employees contribute with after-tax dollars that are nondeductible – these accounts resemble traditional IRAs but allow for lower annual contributions limits; only applicable to employers/self-employed.
Taxes
Individual retirement accounts offer many tax-saving and money-growth advantages. But it’s essential that you understand the differences among traditional, Roth, SIMPLE and SEP IRAs before choosing one.
Traditional IRAs are an excellent investment option for anyone who’s unprotected by a workplace plan and has taxable income, as they allow immediate tax deductions while deferred growth.
Self-employed or small business owners can bolster their savings with a SEP IRA, which provides more investment options than an employer-based plan might. Furthermore, those switching jobs who hold previous employer 401(k) funds can easily transfer them over into an IRA account with minimal hassle (Investopedia has an in-depth explanation of IRAs).
Withdrawals
When withdrawing money from traditional IRA accounts, any withdrawal must be included as income and taxed accordingly. You are taxed both on nondeductible contributions made as well as investment earnings.
Traditional IRAs can be an excellent way to invest money if you haven’t had an opportunity to contribute to your workplace retirement plan yet. Furthermore, these accounts offer the option to roll over funds from former employer retirement plans into your own account.
Consider whether or not you anticipate being in a higher or lower tax bracket during retirement to help determine which account would best suit you. If it looks likely that you’ll fall into the latter group, the traditional IRA could make more sense as it allows deferral of taxes until then; otherwise speaking with a financial professional may make the best choice.
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