Different Types of IRAs – What are Different Types of IRAs

by Retirement Advisor | Oct 21, 2022 | SEP IRA | 1 comment

What are different types of iras – What is the different types of iras? 1-800-566-1002 . What are the best different types of iras for retirement and learn how you can avoid the most common mistakes that individuals have made when looking to set up the different types of iras.
Understanding the Different Types of IRAs

Many people get confused about individual retirement accounts or IRAs because there are several different kinds of these vehicles available to the public. All of the IRAs are based on the same idea a person is allowed to set aside a portion of his income in a tax-deferred vehicle to save for retirement. Tax deferred means that you will not have to pay federal income tax on the funds in the IRA until you take them out.

Since IRAs were first created in 1974 changes in the tax code and innovation in the financial industry has given rise to several different types of IRA. The most popular varieties of individual retirement account are listed below.

Traditional IRAs

A Traditional IRA refers to the first kind of individual retirement account created by Congress in 1974. It is simply a tax-deferred bank or investment account. Under current law, most people can contribute up to $2,000 a year to a traditional IRA. Such an IRA has to be set up as part of an employer’s retirement plan which allows employers to match workers contributions. The funds in the traditional IRA can be invested in anything you wish including stocks, annuities, mutual funds and even precious metals like gold. There are quite a few restrictions on traditional IRAs including income level restrictions. Funds withdrawn from a traditional account before the account holder reaches age 59½ are subject to a 10% tax penalty and income tax at the normal rate.

SEP IRA

A SEP IRA or Simplified Employee Pension retirement account is an IRA designed for small business owners and employers. Unlike a traditional IRA, a SEP IRA does not have to be part of an employers’ retirement plan. A SEP IRA has the all the same limitations has a traditional IRA, except that it can exist as a standalone vehicle. This enables self employed persons and employees of small businesses to take advantage of that arrangement.

SIMPLE IRA

A SIMPLE IRA or Savings Incentive Match Plan for Employees Individual retirement account is a more flexible IRA available to some employees. In a SIMPLE IRA, the employer matches the employees’ tax deductible contribution. The advantage to a SIMPLE IRA is that the level of tax deductible contributions allowed is higher $11,500 and there is no required amount of contributions. A disadvantage to a SIMPLE IRAs that SEP and Traditional IRAs cannot be rolled over into one.

Roth IRA

The big advantage to a Roth IRA is that funds are not subject to federal income tax after they have been placed in one. No tax is charged on the funds in the Roth and no income tax is collected when the money is taken out. The disadvantage to this arrangement is that income tax is charged when funds are contributed to a Roth IRA. That means a person cannot take advantage of tax deferral with a Roth. Another advantage to a Roth IRA is that a person can make contributions to one until he reaches age 70.

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