There’s an IRA for everyone.

Planning for retirement is not complete without an IRA. It’s one of, if not the, most recommended to have.

But, not all IRA’s are the same. Whether you’re just beginning your investment journey or are interested in exploring other options, we’ve got you covered. We’ve outlined some of the different types of IRAs and how they might benefit you.

Traditional IRA

As one of the most popular types of IRAs, the traditional IRA is a commonly held tax-advantaged saving account. One of the features of this account is that your contributions are deductible. Meaning, it will lower your taxable income for the year. However, whether it is deductible or not, will depend on your current income and retirement plan.

This account also offers an upfront tax break of up to $6000 in 2020 and 2021. And, as always, investments are not taxed as long as the money remains in the account.

So, who is this option really best for? We suggest it’s best for those of you who think you’ll be in a lower tax bracket come retirement. Or, those who do not have access to a workplace-sponsored retirement plan.

Roth IRA

The key difference with a Roth IRA is that its contributions are not deductible. This means that you will not receive an upfront tax break. However, any withdrawals that are made during retirement will be completely tax-free.

Keep in mind that the maximum annual contribution is $6000 (or $7000 if you are aged 50+). But, Roth contributions are based on income and if you are deemed to earn ‘too much you’ might not be eligible.

One of the main benefits of this account is its withdrawal rules. These tend to be more lenient and allow for tax and penalty-free withdrawals at any time. However, taxes and penalties apply to withdrawals before retirement.

The best type of person that this account is for are those that think they will be in a higher tax bracket come retirement. That’s because you’ll be able to take advantage of the tax-free withdrawals. This is also a good idea if you think you’ll need access to the money before retirement.

SEP IRA

For those unfamiliar with a SEP IRA, this is a simplified employee pension. This account is set up for employees by an employer. With this account, the annual contribution limits are much higher than what’s typically allowed with other accounts (it is the lesser of up to 25% of employee compensation or $57,000 in 2020 and $58,000 in 2021).

It is good to note that an employer must contribute annually to this, but that the size of their contribution may vary. As an employer, you are not allowed to contribute to the plan with a salary deferral and catch-up contributions for workers 50 or older are also not allowed.

But, this is a great option for small business owners who want to avoid the large costs of other retirement plans and still get a deduction.

Nondeductible IRA

A nondeductible IRA is a great option for people that have a retirement plan with work (or if your spouse does) and your income exceeds the IRA income limits.

This account still gives you the option to invest, but the amounts are non-deductible (because they are made with after-tax dollars). However, you still get the benefit of tax-deferred growth on earnings.

Spousal IRA

If you’re a married taxpayer, you might want to consider a spousal IRA. This account is mainly geared towards lower income or non-working individuals who are married to someone who has earned income.

For this to work, couples must file a joint tax return and have taxable compensation to be eligible. Keep in mind that contribution limits are the same for traditional or Roth IRAs and the account can be funded by either spouses’ earnings. However, it does need to be opened in the non-working spouse’s name.

SIMPLE IRA

This account is very similar to an employer-sponsored 401(k). SIMPLE stands for a Savings Incentive Match Plan for Employees. It mostly exists to help small companies or self-employed individuals.

But, its main difference is that employees are allowed to contribute using a salary deferral. The account also has contribution limits that are lower than a 401(k) ($13,500 versus $19,500) in 2020 and 2021.

Employers are also required to add in a 3% matching contribution or a fixed contribution of 2% of each employee’s compensation.

Ultimately, saving for retirement can be intimidating. Especially when you don’t know what account is right for you. But, with a strong financial plan, dedication, and help from a trained professional you can meet your goals. For advice or a free consultation, call us today at 407-328-5001.

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