Traditional and Roth IRAs provide tax-advantaged retirement savings. Evaluate investment options, fees and advice programs available at brokerage firms, mutual fund companies or robo-advisors before selecting one for yourself.
Traditional IRAs offer you an immediate tax break, while Roth IRAs may provide more beneficial tax-free withdrawals in the future.
Traditional IRA
A traditional IRA allows you to deduct contributions from your income, reducing your tax bill. Furthermore, deferring taxes until retirement when your tax bracket may be lower allows for easier withdrawals of investment earnings from an IRA.
As it’s impossible to predict your tax bracket in the future, saving as much in an IRA as possible is wise. Both upfront tax savings and potential tax-deferred investment growth make the traditional IRA an excellent choice for most investors.
Your options for opening a traditional IRA include online brokers, financial institutions and banks – with brokers typically offering more investment choices than banks which tend to specialize in CDs or savings accounts. You have the choice of investing manually yourself or opting for more automated investing by employing an automated robo-advisor which uses algorithms to select investments automatically for you.
Roth IRA
Roth IRAs are widely considered the premier retirement account option due to their tax-free withdrawals; however, if they’re unavailable to you there are other solutions which offer savings and growth potential that match that of a Roth.
Traditional IRAs serve as personalized pensions, offering tax breaks in exchange for restrictions and limitations on accessing funds. Their suitability depends on your income projection for future years as well as any change to your tax rate from now.
Individuals early in their careers who expect low future incomes often find the Roth IRA’s upfront tax advantages particularly appealing, and also appreciate its ability to allow flexible withdrawals during retirement (subject to certain rules).
Employer-Sponsored IRA
People often assume Roth and traditional IRAs are the go-to retirement account options, but there are other alternatives such as spousal, SIMPLE and SEP IRAs they should also take into consideration when saving.
Employer-sponsored IRAs are commonly utilized by small employers and function like 401(k) plans: employees contribute pre-tax money through payroll deductions and their investments grow tax-deferred until it comes time to withdraw the money from the account.
An SEP IRA is the perfect retirement solution for self-employed individuals and small business owners, enabling them to make tax-deductible contributions of up to 25% of their compensation each year while still enjoying complete contribution flexibility.
If you want to make saving for retirement easier, look for an employer-sponsored SEP IRA or an individual retirement account from one of the large brokerage firms like E*TRADE, Fidelity Investments or Vanguard with human advisors on staff who will rebalance and track your investments automatically while helping you meet your goals.
Self-Employed IRA
SEP IRAs are ideal for small-business owners looking to boost their retirement funds with high contribution limits and no catch-up contributions for people over 50. While these IRAs provide high contribution limits compared to traditional IRAs and even employer sponsored 401(k) plans, they come with one major disadvantage – no catch-up contributions for people aged 50 or above are permitted.
Business owners with multiple employees needing contributions made on their behalf may find the account more time consuming, with additional work such as making employee contributions as well as himself contributing. That may be a deal breaker for entrepreneurs who would prefer avoiding the administrative burden and costs of individual 401(k), which requires annual reporting to the IRS and more paperwork.
If you decide to set up a SEP IRA, be sure to compare fees, minimum investments and investment options between SEP IRA custodians. NerdWallet’s ratings help you select an online broker or robo-advisor with the right combination of costs, flexibility and investment options for you. Investing for retirement is one of the most crucial things you can do for yourself but can sometimes be daunting and confusing.
