IRAs are an efficient way of saving for retirement and may provide tax advantages depending on which type of IRA you select.
A traditional IRA allows you to reduce current year income tax liabilities while deferring earnings until retirement (early withdrawals before age 59 1/2 may incur a 10% penalty).
Simplified Employee Pension, or SEP, IRAs are designed for self-employed individuals and small business owners with higher contribution limits than a traditional IRA.
Traditional IRA
Individual Retirement Accounts (IRAs) offer both potential tax benefits and investment choices that could make saving for retirement easier.
Traditional IRAs enable individuals to deduct contributions up to certain limits from their federal income taxes and pay income tax only when withdrawing the funds, typically during retirement. They’re ideal for people expecting lower tax brackets upon retiring than they were while earning it.
Investors with Individual Retirement Accounts (IRAs) have access to a diverse array of investments, such as mutual funds and exchange-traded funds (ETFs). When selecting an IRA provider, make sure you pay close attention to fees, commissions and minimum opening requirements – when choosing one. You can open one at brokerage firms, banks or credit unions that provide retirement accounts – or you could invest through SIMPLE or SARSEP accounts that offer employer-sponsored plans for small businesses and self-employed people.
Roth IRA
Roth IRAs provide tax-free withdrawals in retirement if certain income restrictions are met, making them an ideal option for individuals expecting to fall into lower tax brackets post-retirement than when earning wages.
A SIMPLE IRA is an ideal retirement solution for small businesses and is easier to administer than a 401(k). Employers can match up to 3% of employee contributions dollar for dollar, or make non-elective contributions totalling 2% of each worker’s salary.
Before opening an IRA, carefully review the investment options provided by various providers as well as any fees that may apply. Some providers charge higher trading fees than others and some require a minimum account balance to open an account with them. You should also consider your trading activity, which will impact costs; and see whether they offer low-cost diversification strategies like robo-advisor or target date fund options that meet your time horizon and risk tolerance needs.
SEP IRA
SEPs (Simple Employee Pension Plans) are simple retirement accounts businesses can set up for themselves and their employees, which allow the employer to deduct contributions from its tax bill while contributing a percentage of each eligible employee’s compensation to these accounts similar to traditional IRAs, except employees aren’t permitted to make contributions themselves.
Withdrawals from SEP IRAs are subject to ordinary income rates, and there’s no age requirement for taking them out. SEP funds may be invested in many types of securities including stocks, mutual funds, ETFs and even real estate.
SEP IRAs typically feature lower contribution limits than other workplace retirement plans, yet are easy to establish and administer. Your financial institution or trustee handles depositing and investing the money, annual statements, filing with the IRS when necessary and any other administrative tasks. There are minimal requirements involved with creating a SEP plan, such as providing key disclosure documents to employees as well as issuing them their own IRS Form 5305-SEP form.
SIMPLE IRA
SIMPLE IRAs offer self-employed individuals and employees of small businesses all of the advantages of both SEP IRAs and traditional IRAs in one comprehensive solution. Eligible workers specify how much of their paycheck they wish to contribute through payroll deductions before choosing how the money should be invested – this way employee contributions grow tax deferred until withdrawals take place.
Employers can match employee contributions dollar for dollar up to 3% of compensation or make non-elective contributions of their own up to this limit, offering employees a selection of investments as part of participation criteria. An employee must have earned $5,000 in any two previous calendar years or anticipate that amount in one or more years prior to joining this plan in order to participate.
SIMPLE IRAs are one of the easiest retirement plans to set up and maintain, with minimal startup and ongoing costs. But they may be less flexible than their 401(k) counterparts when withdrawing funds; so it is wise to consult a financial or tax professional before considering one as your retirement savings solution.
