An IRA is an individual retirement account. There are many different types of IRAs that you can invest in, but they all have the same purpose: To help you build up your savings for when you retire. Some benefits to using a traditional IRA include tax-deferred growth and higher annual contribution limits than those allowed with Roth accounts. For more information, read this article!
Different types of IRA options:
- Traditional IRA
Description: This is the most common type of IRA. It allows your money to grow tax-deferred until you make withdrawals in retirement (in other words, when you stop working). You can usually deduct part or all of your contribution from taxes depending on how much income you have and what kind of account(s) you have.
Income limits: Your contributions are usually tax-deductible if your income is below a certain level and when your employer(s) don’t offer retirement plans such as 401ks or defined benefit pensions.
- Roth IRA
This type of account allows your money to grow tax-free. Your contributions are not deductible from taxes, but withdrawals are 100% tax-free in retirement (in other words, when you stop working). However, keep in mind that there is a five-year waiting period before you can withdraw any earnings without penalty.
Income limits: There are no income limits to contribute to one of these accounts, but if you make too much money, the amount of your deduction may be limited or non-existent (see traditional IRA information above).
- Simplified Employee Pension (SEP-IRA)
A SEP is a retirement plan for self-employed individuals and small business owners. It’s the least complicated of all types of IRAs because you can contribute as much or as little money into your account each year, and there are fewer reporting requirements than with other plans.
- Rollover IRA
A rollover IRA is a traditional or Roth IRA that has been converted from an employer retirement plan. If your company’s 401(k) plan allows you to take the money in the account as cash, this may be one of your options for accessing it while avoiding taxes and penalties. You can also transfer these accounts to a financial institution of your choice.
To conclude, the type of IRA to use depends on what you want to get out of it. If you plan on retiring relatively soon, a Roth IRA may be your best bet because you would not have to pay taxes when withdrawing funds in retirement. On the other hand, if you want to contribute more money or plan on working longer in life, then a traditional IRA may be better for you!