7 Different Kinds of IRAs – Finding a Suitable Option
Most people only think about traditional and Roth IRAs when searching for a suitable individual retirement account option. However, other attractive IRAs could help you save and increase your benefits. Today, we take a comprehensive look at the seven different kinds of IRAs to help you pick a suitable option.
Although traditional IRAs are quite common, most people don’t know how they work. For starters, you get to make tax-deductible contributions from the start. You pay taxes each time you make withdrawals in retirement. However, investment earnings do not get taxed if the money stays in the account. Other key features of this account include the following:
- Your taxes get differed
- Maximum contribution of $6,000 per year – those above 50 can make a catch-up contribution not exceeding $1,000.
Who Needs a Traditional IRA: People who predict that their tax bracket will be lower upon retirement. Workers who are either not eligible or don’t have employer-sponsored retirement plans can also benefit from this account.
Unlike traditional IRA, Roth IRA lets you pay taxes now and make tax-free withdrawals later. Therefore, all contributions get taxed at the current rate. Below are a few key features of the Roth IRA:
- There are no tax breaks when making contributions.
- Retirement withdrawals are tax-free.
- You can contribute a maximum of $6,000 per year – $7,000 for those 50 years and above.
- Eligibility comes down to your level of income. Although higher earners may not be able to contribute, there are other legal ways to open an account.
- Withdrawal rules for the Roth IRA are more flexible.
Who Needs a Roth IRA: Those who expect to retire at a higher tax bracket than they are now can take advantage of this account. It is also best if you anticipate the need for money before retirement.
A simplified employee pension (SEP) IRA functions as a traditional IRA. However, it includes a higher contribution limit. Also, employers get to open these accounts for their employees and make contributions on their behalf. Below are key features of SEP IRA:
- Earnings get to grow tax-free.
- Taxes are paid upon distribution.
- There is no option for catch-up distribution.
- Contributions cannot be from your salary – you also must have earned at least $600 during the year and worked for at least three of the last five years with your employer.
- Sole proprietors get to open these accounts for themselves.
Who Needs a SEP IRA: Small-business owners are best suited for these accounts because they get to avoid the costly operational fees of a conventional retirement plan. However, ensure you follow the rules on SEP IRA.
Contrary to traditional IRA, contributions to non-deductible IRA aren’t tax-deductible. It is an option when you or your spouse has a retirement plan and your income surpasses the IRA income limit. A few key features of this account include the following:
- Earnings growth is taxed and not the principal.
- Contributions to this account are with after-tax dollars.
Who Needs a Non-deductible IRA: Everyone who does is not eligible for a deductible IRA or a Roth IRA.
Working as an employer-sponsored 403(b) or 401(k), Simple IRA exists for self-employed individuals and small companies. Employees are, therefore, allowed to make contributions using salary deferral– unlike the SEP-IRA. Some of these plans allow an employee to choose a suitable financial institution to hold their contribution. Other key features include the following:
- Lower contribution limits compared to 401(k)s – $14,000 in 2022.
- Employees need to have earned a minimum of $5,000 during any previous two years before the current financial year. Also, they should expect to receive similar earnings in the current year.
- It allows for a catch-up contribution (up to $3,000) if you are 50 years of age or older.
Who Needs a Simple IRA: Those who are self-employed or own a small business can benefit from this account. However, the SEP-IRA is an excellent choice due to its higher contribution limit. The amount of contributions you can make will determine whether to use a Sep IRA or Simple IRA.
Every investor has heard of a self-directed IRA due to its flexibility and versatility. Although it works like a Roth and a traditional IRA, you get to invest in assets beyond bonds, stocks, and mutual funds. These accounts allow you to invest in hard assets (including gold), privately held companies, and real estate. Below are key features of self-directed IRA:
- You must start the account with the help of a custodian or trustee with investment experience.
- You cannot include life insurance policies and collectibles in your account.
- You are not allowed to borrow money from your IRA.
Who Needs a Self-Directed IRA: Investors looking to access alternative investments, including non-traditional businesses and real estate. However, it includes significant risks that you must understand before opening an account.
According to the IRS rules, you need earned income to contribute towards an IRA. Luckily, there is an option for married taxpayers when one of the two is not working, or earns a small amount. It ensures each of you can contribute to separate IRAs (traditional or Roth). Let us take a look at some of the key features of this account:
- Couples must have taxable contributions and file joint tax returns.
- Includes similar contribution limits to Roth and traditional IRA
- The account needs to be opened using the non-working spouse’s name and their social security number. However, either spouse’s earnings can channel the contribution.
Who Needs a Spousal IRA: Non-working or low-income married individuals are best suited for this account. However, the other spouse needs to be working.
Let Us Help
There is an IRA for everyone – whether you want to save taxes on your hard-earned money now or in the future. Ensure you pick an option that best works to secure your financial future. It will also help to look into diversifying your investment portfolio. At Masterworks, we are an exclusive community investing in blue-chip art. Ensure you request an invitation today to get started.