An IRA is an individual retirement account. It is a form of pension that may or may not allow tax relief on savings. IRAs are a safe option for those who want to set aside money for their old age and have a source of income to maintain their lifestyle even after they have stopped working.
However, there are various types of IRAs, and knowing about them would give you an idea about the type of IRA account you must opt for. For that, you need to know their purpose and have a clear idea about your finances and goals for the future. They also come with their own tax advantages, although they might differ from state to state.
If you have some disposable income in your old age or have been a 401(k) employee, you have some retirement savings from your employer. If you are looking forward to diversifying your financial portfolio to live comfortably after retirement, opening an IRA account should definitely be on your radar.
Here are some forms of IRAs you may consider for your retirement.
Traditional IRA
Suppose you are under 50 and you can contribute up to $6,000 or 100% of compensation, whichever amount is lower. In that case, you can opt for a traditional IRA. If you are over 50 years old, the amount goes up to $7,000. It is a good option if you do not have a traditional retirement plan, earnings lower than $78,000 as a single earner, or $129,000 as married.
You can have lower deductions if you have a 401(k) from your employer. The contributions to a traditional IRA are tax-deferred, and the investments are allowed to grow tax-free unless you make withdrawals. You can make withdrawals without penalties once you have reached the age of 59 years and six months.
Roth IRA
Same as a traditional IRA, you can contribute up to $6,000 or 100% of compensation, whichever is lower, under the age of 50. If you are over 50, you can contribute $7,000. Since Roth IRAs have different phase-out ranges, you must know your finances well. For single taxpayers, the phase-out begins at $129,000 and ends at $144,000.
For married taxpayers, it starts at $204,000 and ends at $214,000. However, Roth IRAs cannot be deducted from taxable income, and even when you make qualified withdrawals, they are not taxed.
SEP IRA
Simplified Employee Pension or SEP IRA is for those who have small businesses or are self-employed. One has to be at least 21 years old to start contributing to the SEP, with at least three years of income and yearly earnings of $650.
It is a tax-deferred account, and employers can contribute up to 25% of eligible income, or up to $61,000. Only the employer can make contributions from the company through payroll, which need not be funded yearly.
SIMPLE IRA
A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is something a small business owner can start for the employees. Willing and eligible employees can choose to defer income from their salaries, much like a 401(k) scheme.
The employer will make a contribution every year for eligible employees, which can either be 2% of the paycheck for all eligible employees, whether they want to participate or not, or it could be 3% of the paycheck for willing employees. Some employers prefer SIMPLE to a 401(k) because they are eager to execute, and employees can make up to approximately $14,000.
Self-Directed IRA
Self-directed IRAs come under traditional or Roth IRAs, but you need a custodian for the account. You can also make investments that are not included under other forms of IRA and choose some alternative forms of investment.
This kind of contribution comes with its share of market risks. Hence, it is important to be very vigilant and knowledgeable about investments if you want to direct your funds.
Spousal IRA
In any other form of IRA, you must have your own earnings to contribute to your IRA account. However, a spousal IRA is for married couples where only one of the partners has an income but files their taxes jointly. Any form of deduction is subject to the adjusted gross income limits.
Inherited IRA
An inherited IRA can be opened if you are the beneficiary of someone else’s retirement plans after their death. There are rules that will come with the plan regarding how you can distribute the assets of the account. It will depend on factors like your age, the relationship you had with the deceased, and other eligibility criteria.
There are special rules for minors, disabled beneficiaries, spouses, or if the account holder is more than ten years younger than the deceased.
Rollover IRA
A rollover IRA is opened when you receive funds from your previous employer’s workplace retirement plans if you had a 401(k) or 403(b) with them. They can be traditional or Roth IRAs, and this applies to those who have changed organizations.
Custodial IRAs
Created for minors, these are traditional or Roth IRAs. A maximum of $6000 can be contributed to the account. The assets are managed by the custodian until the minor has reached the age of 18, or in the case of some states, age 21. The minor must have some sort of earned income, like interest from other investments or if they have summer jobs, to qualify for the account.
At South Star Wealth Management, we help you choose the best retirement schemes and investment strategies suitable for your lifestyle and to meet your needs. Our consultants will speak to you about the various kinds of options you have at your disposal. Do you want an IRA only to meet your lifestyle needs, or will it cover additional expenses like traveling or insurance? Or are you simply interested in diversifying your portfolio?
Contact us today, and we will help you allocate your resources in the best possible way so you can enjoy your retirement without worries.