What Type of IRA is Pre-Tax?
IRAs are tax-advantaged investment accounts designed to help individuals save for retirement. Available from banks, credit unions and brokerage firms.
IRA accounts can hold most publicly traded securities and some alternative investments; however, certain forms of investments may be restricted or prohibited under Internal Revenue Code regulations or rules of an IRA custodian.
Pre-tax
Retirement accounts offer various options to choose from, with contributions that are pre-tax, tax-deferred or tax-exempt having different implications on your wallet. Understanding these differences is vitally important.
Traditional IRA contributions can be made using pre-tax dollars and their investment growth tax deferred until they’re withdrawn, which usually happens upon retirement. If funds are withdrawn prior to age 59 1/2, however, you’ll owe taxes on them as income.
Everyone with earned income can contribute to a traditional IRA, but tax deductions depend on several factors including income and whether or not an employer-sponsored retirement plan exists. Use our IRA Contribution Calculator to see if you’re eligible!
Roth
Roth IRAs may provide tax benefits that depend on your future tax situation. Withdrawals from Roth IRAs typically qualify for tax-free withdrawals after holding them for five years or longer (and you are at least 59 1/2), although any earnings withdrawn prior to that are subject to income taxes and may even incur a 10% penalty tax. You can transfer funds between traditional and Roth accounts; however there may be limits as to how much each type of account can accept as contributions.
Roth IRA contributions begin to phase out at certain income levels, while contributions to traditional IRAs and most employer sponsored retirement plans remain tax deductible without restrictions or limits. A good strategy would be opening a Roth IRA if you anticipate having higher tax rates in the future – paying taxes now rather than later can help save on penalties! You can open one at most banks or brokerages.
SEP
If you run a small business, are self-employed or freelance (even as just a side gig), a Simplified Employee Pension- Individual Retirement Account could be ideal. Much like traditional IRAs, contributors and their investments will be exempt from taxes until taking them out upon retirement.
SEP IRAs offer great flexibility with regard to who may participate. By default, the IRS allows any employee over 21 and earning at least $750 annually (subject to inflation adjustment). You may define compensation more broadly than is permitted by the IRS but must do so consistently across your business.
SEP IRAs provide more investment options than other workplace plans, including mutual and exchange-traded funds. However, their one major drawback is requiring equal contributions from each employee whose wages you manage towards it.
SIMPLE
Traditional IRAs provide individuals who do not have access to an employer-sponsored retirement plan such as a 401(k), with many advantages including upfront tax savings and tax-deferred investment growth until withdrawal. Deductibility for contributions will depend on income level and filing status.
The SIMPLE IRA plan permits employers to automatically deduct a percentage or set amount from employees’ wages and requires that an annual election period last at least 60 days, with notice given prior to making their decisions.
Rolling over SIMPLE IRA funds into an individual retirement account is essential if you are changing jobs or leaving your company’s retirement plan, yet doing so may have some complex tax ramifications; it is therefore vital that you understand these rules so as to avoid paying unnecessary taxes and fees. Click here for more on IRA Rollovers.
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